Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017 has been implemented w.e.f 19th December 2017

The Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Rules, 2018, Notified on 23rd March 2018, replaces the erstwhile Maharashtra Shops and Establishments Rules, 1961.

The Rules are applicable to all commercial establishments in Maharashtra State, which employ 10 or more employees (not covered under the Factories Act).

Definition of Establishment 
[Sec. 2(4)]

“establishment” means an establishment which carries on, any business, trade, manufacture or any journalistic or printing work, or business of banking, insurance, stocks and shares, brokerage or produce exchange or profession or any work in connection with, or incidental or ancillary to, any business, trade or profession or manufacture;

and includes establishment of any medical practitioner (including hospital, dispensary, clinic, polyclinic, maternity home and such others), architect, engineer, accountant, tax consultant or any other technical or professional consultant;

and also includes a society registered under the Societies Registration Act, 1860, and a charitable or other trust, whether registered or not, which carries on, whether for purposes of gain or not, any business, trade or profession or work in connection with or incidental or ancillary thereto;

and includes shop, residential hotel, restaurant, eating house, theatre or other place of public amusement or entertainment; to whom the provisions of the Factories Act, 1948 does not apply ;

and includes such other establishment as the State Government may, by notification in the Official Gazette, declare to be an establishment for the purposes of this Act;

In Earlier Act : It was not applicable to Chartered Accountants, Medical Practitioners and Legal Practitioners

Registration & Renewal of License

The provisions of the act shall be applicable on establishments employing 10 or more employees. Therefore the registration under the act shall not be applicable for establishments having less than 10 employees ( However the same shall not be applicable for the establishments already registered and having the valid S&E and till the expiry of the said registration. (Only Online Registration).

Intimation of Commencement of business by such employer engaging less than ten employees

The employer of every establishment engaging less than ten employees shall submit an online intimation in Form ‘’F” of commencement of the business along with the required documents.

Issue of Receipt of Intimation – After receiving an intimation in Form “F” alongwith all the documents, a receipt of such intimation in Form “G” shall be issued to the applicant online.

In Earlier Act : Registration was applicable even for zero head count

• Maharashtra Shops and Estb., Act, 2017 :- The application for registration under the Act should be filed within 60 days from the commencement of operation.

In Earlier Act : it was Within 30 days from the commencement of operation

Maharashtra Shops and Estb., Act, 2017: The renewal of registration need to be applied online, not less than 30 days before the date of expiry of registration.

In Earlier Act : it was 15 days prior to the expiry

No Fees payable for S&E License

There will be no fees charged for the following: application for registration, renewal of certificate of registration, and changes in the certificate of registration. However, the employer may have to pay the electronic transaction or service charges as periodically fixed by the state government for availing e-services under the 2017 Act and the 2018 Rules.

In Earlier Act : Fees payable as per the Schedule on the basis of Employees strength.

Working Hours

Maximum 9 hours/day (excluding lunch hours) & 48 hours/ week

Interval / Rest: An employee must be allowed an interval of rest of at least 1/2 hour after 5 hours of continuous work

Every Six Days work perform Seventh day should be the paid holiday.

Spread over

The spread-over of an employee in establishment shall not exceed 10.5 hours in any day.

In Earlier Act : Earlier 11 hours in any day.


The total number of overtime hours shall not exceed 125 hours in a period of 3 months. It has to be paid double the ordinary rate of salary / wages.

In Earlier Act : Earlier 6 hours in a week

Identity Card

The employer of an establishment shall furnish to every employee an identity card. Such card shall contain the following and such other particulars as may be prescribed, namely :—

the name of the employer ;the name, if any, and the postal address, of the establishment;the name and age of the employee;date of joining, department, nature of work, designation;the signature (with date) of the employer or manager;Blood Group;Aadhaar Card Number.

In Earlier Act : There was no such provision

Earned Leave

Earned Leave – One day earned leave for every 20 days of work.

Maximum accumulation of Earned Leaves shall not exceed 45 days.

Further the employee is allowed to encash leave in excess of 45 days, if the employer refuses to sanction the leave.

In Earlier Act : it was 21 days in year for the 240 days work performed, maximum accumulation of 42 days.

Casual Leave

Casual Leave : 8 days (8 days in a year which shall be credited into the account of the employee on a quarterly basis, i.e. per quarter 2 days).

In Earlier Act : Earlier there was no provision for casual leave

Earlier (Existing) Benefits will be continued in Case of Earned Leave, Sick Leave, Casual Leave and any other benefits

Any Benefit, Law, Contract, Custom or Usage applicable before the commencement of this Act is not affected. Such benefits shall 
remain unaffected. (Such benefits shall be continued)

National and Festival holidays

Employees shall be entitled for holidays on 26-Jan, 1-May, 15-Aug, & 2-Oct and 4 such other festival holidays, agreed by the employer and employees.

In Earlier Act :- No provision of Festival holidays

Women Employees

No women shall be discriminated in the matter of recruitment, training, transfers, promotion or wages.

Women employees with their consent shall be allowed to work between 9:30 p.m. and 7 a.m., in any establishment only after obtaining her consent in Form “L”.

In which adequate protection of their dignity, honour and safety, protection from sexual harassment and their transportation from the establishment to the doorstep of their residence as may be prescribed are provided by the employer or his authorised representative or manager or supervisor.

Hiring women security guards

Employing woman security guards is now mandatory in establishments employing not less than 10 women employees. The 2018 Rules specify the number of such security guards required, depending on the size of the workforce.

The establishment must also undertake mandatory police verification of the candidates who are recruited as women security guards.

Additional paid holiday for women employees

Every women employee who works during the night as per her shift schedule is entitled to one additional paid holiday for every two months in a year.

Maternity leave for night shift women employees

The Rules provide that women employees cannot work night shifts during a period of 12 weeks before and after child birth, of which at least 12 weeks must be before childbirth, and any further period that as may be specified in her medical certificate.

Safety of women in the workplace

Every employer has to submit an annual undertaking stating their provision of all the facilities mentioned under Rule 13 of the Rules. These include conditions for the employment of women in general as well as during night shifts.

In Earlier Act : There was no such provision for women Employees

Provision of Creche or Suitable Room for the use of Children

Establishment wherein fifty or more employees are employed, there shall be provided and maintained a suitable room or rooms as crèche for the use of children of such Employees. Provided that, if a group of establishments, so decide to provide a common crèche within a radius of one kilometre, then, the same shall be permitted by the Chief Facilitator, subject to such conditions as may be specified in the order.

In Earlier Act : There was no such provision

Part time employment

Wages payable to a part time employee is calculated by dividing the per day rate of ‘minimum wages’ applicable to that category of employment by eight hours plus a fifteen percent rise on it or by dividing the prevailing daily wage rate for permanent employees doing similar nature of work in that establishment by eight hours plus a fifteen percent rise on it, whichever is higher.

No part time employee should be allowed to work overtime under any circumstances. This is to prevent the misuse or exploitation of part time employees.

In Earlier Act : There was no such provision for Part Time Employment.

Health, Safety, and Welfare Committee

A Health, Safety and Welfare Committee must be formed in establishments with 10 or more employees, under the 2018 Rules; it should consist of an equal number of employer and employee representatives, respectively.

The committee must also have a sufficient number of women representatives, wherever women employees are employed.

In Earlier Act : There was no such provision.

Fire and safety framework

Every employer has to adopt and implement all the safety measures mentioned, suggested, and recommended in the government’s Fire and Safety Policy, which may be further updated periodically.

Information regarding persons discharging managerial function

This relates to the information provided to the facilitator in Form ‘T’ on the names, designation, and brief nature of the duties of persons who perform management functions. It must be submitted annually and whenever there is any change, during the year.

In Earlier Act : There was no such provision

Information regarding persons doing confidential work

The information in Form ‘U’ relates to the names of persons who provide confidential information to the establishment. This needs to be submitted annually and whenever there is any change, during the year.

In Earlier Act : There was no such provision

Complaint box and display of numbers

Every employer must maintain a complaint box and display the phone numbers of the local police station, police control room, and women area helpline prominently in the establishment.

In Earlier Act : There was no such provision

Name Board in Marathi

The Name Board – Marathi in Devnagari Script

Along with Marathi, other Language may be use

Provided also that, no establishment where liquor is served or sold shall have a Name Board in the name of legends or fort.

Preservation of records

Every employer or manager must preserve the inspection records of the local facilitator (official seeking compliance) for a period of three years.

Cancellation of Registration Certificate / License

Where the Facilitator proposes to take action under Section 8 for cancellation of registration he shall, –

i) by a notice require the employer to submit his say as to why the registration shall not be cancelled.

ii) if, within 10 days from the date of the receipt of the notice, the employer fails to submit his say alongwith relevant documents, the facilitator may cancel the registration.

If within the period of ten days, the employer submits his say alongwith all relevant documents the facilitator may, after considering the say and the documents either withdraw the notice or cancel the registration as he may deem fit.

Filing annual return

Every employer must upload the annual return online in Form ‘R’ on the website within two months for the year ending on December 31, instead of the financial year ending on 31st December.

In Earlier Act : There was no such provision

Penalty on compounding of offence

The maximum fees for compounding of an offence (making a settlement to avoid prosecution) may be imposed by the compounding officer shall not be less than 50 percent of the maximum fine specified for such offence under the 2017 Act.

Penalty for contravention of the Act

The penalty for contravention of the Act and the rules has been enhanced to INR 100,000 and in case of continuing contravention an additional fine which may extend to INR 2000 for every day during which the contravention continues. Further, for repeated offenders the fine may extend to INR 2,00,000.

In Earlier Act : The Earlier Act provides for a minimum fine of INR 1,000 and a maximum fine of INR 5,000.

Copies of documents


My client is a dealer registered under MVAT Act, 2002 and Goods & Services Tax Act, 2017.

He requires certified copy of entire file of assessment, recovery proceeding and prosecution proceeding including proceeding sheet.

But the authority is of the opinion that certified copy of proceeding sheet cannot be issued as the same is confidential.

In the circumstances, I may be enlightened as to whether certified copy of proceeding sheet is confidential and if not then under what provisions of law, it can be issued ?

In past, I read somewhere in one of the seminar book that the same can be issued under 
Civil Procedure Code read with relevant Taxation Law.

Kindly enlighten me as to whether the same can be issued or not along with provisions of law and case laws, if any.

Early reply is awaited in the matter.


Proceeding sheet cannot be said to be confidential. It is signed by dealer also. It is maintained as regular document in assessment file. In fact issues of hearing are covered by proceeding sheet and dealer is entitled to take its copy to know the issues raised. It is within Common Law.

Reference can be made to Rule 73 of Maharashtra Value Added Tax Rules, 2005 wherein fees for obtaining documents are mentioned. Documents will include proceeding sheets also. Therefore, the said sheets can be obtained by paying applicable fees.

You can also ask the same under Right to Information Act.

Cancellation vis-à-vis filing of returns


I am Insurance & Mutual Fund agent. I have migrated my service tax registration into GST. However as my PAN India turnover is below ₹ 20 Lakhs, I have applied on 16-4-2018 for cancellation w.e.f. 1-4-2018. However two days back I have received a SMS from department asking me to file GSTR – 3B for April, 2018. As I have already applied for cancellation w.e.f. 1-4-2018, still I have to file GSTR – 3B for April 2018? Kindly note that my cancellation application is not yet processed by department as it is showing pending for processing on website. Whether this could be the reason for department to ask me to file GSTR – 3B for April, 2018? If so, how long I should keep on filing returns?


Once the application for cancellation of registration is filed it is to be held as effective from the given date i.e. in your case from 1-4-2018, till it is disposed of. If the application is accepted then there will not be any requirement of filing returns from 1-4-2018 itself and your not filing returns from 1-4-2018 will be as per law. If at the application is rejected then returns will be required to be filed.

Under above circumstances, at present there is no need to file returns from 1-4-2018. It appears that the SMS has come since the number is still live on the system. You can write to your jurisdictional officer to note the fact of filing of application because of which the returns are not filed. Thus any consequences for non-filing of returns can be avoided.

Quite often, a manufacturing unit is disposed by an entrepreneur as going concern along with assets and liabilities to another company and the transferee intends to carry on the manufacturing activities in such existing unit. The question arises whether on transfer of various immovable and movable assets of the unit, as going concern i.e., stock-in-trade, consumables, loans and advances, deposits, sundry creditors including outstanding liabilities for a lump sum amount without stipulating any price for individual items i.e. “slump sale” will attract the tax under VAT Act?. As regards, transfer of immovable property i.e. plot of land, factory shed and other structures constructed thereon, its ownership can be transferred only by execution of registered sale deed in favour of the transferee after payment of stamp duty hence it will not attract any liability to pay VAT or GST Law. Attempts are being made by the assessing authority to levy tax on transfer of entire undertaking as a going concern under VAT Act and same question will also arise under 
Goods & Services Tax Act, hence it is discussed hereunder :-

Whenever, a company decides to transfer its industrial unit as “slump sale” to another company, separate agreement is executed for transfer of all movable assets such as plant and machinery, DG Set, electrical installation, furniture & fixtures, air conditioners, computers, factory and office equipments, inventories, tools and consumables, vehicles etc. along with liabilities which remained on the date of transfer along with liabilities. It can be safely claimed that the transferor shall not be liable to pay VAT under MP VAT Act on such transfer on following grounds :-

i) Sale of plant & machinery embedded or fixed in the earth

The word “goods” has been defined u/s. 2(m) of MP VAT Act and u/s. 2(52) of Central Goods & Service Tax Act. It covers all kinds of movable property including computer software, all growing crops, grass, trees, plants and things attached to or forming part of the land which are agreed to be severed before the sale or under the contract of sale. When the plant and machineries, electrical installation, D.G. Set, Air conditioners, Humidification plant etc. are transferred, it will continue to remain in the same status i.e. installed, because such transfer is “on a going concern basis” it cannot be covered within the meaning of “goods” and will not attract any tax under MP VAT Act.

It has consistently been held by Apex Court as well many High Courts that anything which is embedded or fixed in the earth is not covered within the definition of “goods” since goods means movable property only. Reference can be made to judgments of Supreme Court in the case of Mittal Engineering Works Pvt. Ltd. v. CCE (1997) 106 STC 201 (SC).

Duncans Industries Ltd v. State of UP (2001) 1 SCC 633 (SC) & TTJ Industries Ltd. v. CCE (2004) 4 STJ 1 (SC).

ii) “Tax Incidence in case of “Slump Sale” i.e. entire business

The term ‘slump sale’ connotes the sale of an entire business undertaking, comprising of various assets net of liabilities for a lump sum consideration. Though the term has not been defined under any of the State VAT laws or under the CST Act but section 2(42C) of the Income tax Act, 1961 recognises “slump sale” as a transfer of an undertaking and defines the word ‘slump sale’ as under :-

“Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities in such sales”.

Explanation – 2 to aforesaid section further provides that “For the removal of doubts it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees, or other small similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities”.

Next question for consideration is, whether Sale of business undertaking i.e. “Slump sale” can be considered as sale of goods ? Obviously, the answer would be that transfer of entire “business undertaking” to another registered dealer of M.P., as a going concern, i.e. “slump sale”, is neither covered within the definition of “Business” nor “sale” nor “goods” hence the transferor cannot be subjected to tax.When ‘Business’ or ‘Undertaking’ will not fall within the meaning of ‘goods’, VAT implication would not trigger on the transactions involving the transfer of business as a going concern.

In the case of Sri Ram Sahai v. CST [1963] 14 STC 275 (Allah.) it was held that “business” is not a movable property and therefore, it is not covered within the meaning of “goods”. Transfer of entire business undertaking, is not frequently done. It cannot be treated that the seller is engaged in any business activity in disposing of the entire undertaking including movables and immovables and all other properties.

The object of the seller is normally to close down the activity hence it cannot be covered within the meaning of “sale of goods”. [Refer – Monsanto Chemicals of India (P) Ltd. v. The State of Tamilnadu (1982) 51 STC 278 (Mad.) and Sealants and Gasket Industries v. State of Maharashtra (2006) 9 STJ 389 (Mah-Trib)]. It is also worthwhile to note that retention of certain liabilities while transferring entire business by the transferor would not devoid the transaction to be categorized as sale of “business” as held in the case of Zacharia v. State of Kerala (1977) 39 STC 221 (Kerala).

iii) Slump sale – In the course of business :

Any sale of goods can be subject to tax only when it is effected in the course of business of the dealer. Full Bench of A.P. High Court in the case of M/s. Coromandal Fertilizers Limited (1999) 112 STC 1 had held that disposal of entire business as a slump sale is not covered in the course of business even if it involves sale of certain movables hence it is not covered by the definition of “goods”. It further held that the transfer of property in goods as an integral part of the agreement to sell is not “in the course of business” for the obvious reason that the seller wants to put an end to its entire business. An activity directed towards the end or termination of business is not a transaction “in the course of business”.

iv) “Slump sale” is not “sale”

Pursuant to the “slump sale” of the undertaking, entire assets of the company vests in the new company by execution of sale deed. Vesting of business of the undertaking “as a going concern” does not involve any “sale”. The High Court of MP in the case of STI India Ltd (Biplus Division) v. CCT, MP (2007) 10 STJ 657 followed the judgment of M/s. Coromandal Fertilizers Limited (1999) 112 STC 1 (supra) and held that “the sale of movable assets by the petitioner on closure of business, by no stretch of imagination or reasoning can be said to have taken place during the course of business as dealer – the impugned orders levying tax and penalty cannot be sustained”. Even transfer of one unit by a dealer out of many undertakings, as a going concern having separately identifiable assets, liabilities, income and expenditure, will also be considered a transfer of said business as a “going concern” and will not attract any VAT liability. Reference may be made to following judgments :–

a) The Dy. C.S.T. v. Dat Pathe (1985) 59 STC 374 (Kerala);

b) The Dy. CCT v. K. Behanan Thomas (1977) 39 STC 325 (Madras);

c) Lohia Machines Ltd v. CST U.P. (1998) 110 STC 305 (Allahabad).

In substance, a transaction of “sale” attracts tax under VAT Act only if it is carried out (a) in the course of business and (b) if it is a “sale” of movable property and (c) it is a sale of “goods”. As discussed above, transfer of entire business as a going concern is outside the ambit of “goods”, “sale” and “in the course of business”. Therefore, transfer of plant & machinery, electric installations, furnitures and other equipments may be partially covered within the meaning of immovable asset and partially movable assets but when the agreement between the parties is to effect sale of entire business undertaking, as a going concern, the consideration received cannot be covered within the definition of “goods” so as to levy tax as sale consideration under VAT Act.

v) Tax incidence on Slump Sale under GST

The Central Goods and Services Tax Act (CGST Act) does not clearly stipulate the law vis-à-vis transfer of business as a going concern or slump sale. There being no clarity whether the transactions involving slump sale would be taxable under the new CGST Act or not, the provisions of the Act need to be analysed so as to reach a view on the applicability of GST on Slump Sale, though premature.

Charging Section 9 (Levy and Collection) and Section 12 (Time of Supply of Goods) of CGST Act shall be applicable on supplies of all intra-state goods or services or both which shall include transfer of business as a going concern also subject to given exemptions. The scope of “Supply” under Section 7(1) of the CGST Act is wider than the definition of “Slump Sale” under Section 2(42C) of the Income Tax Act, 1961, as it includes any sale, transfer, disposal, lease/license or exchange of goods or services and hence it includes any sale or transfer of goods within its ambit. Section 7(1)(d) includes the activities to be treated as supply of goods or supply of services as referred to Schedule-II. Para-4 of Schedule-II deals with transfer of business assets and Sub-clause (c) excludes the activity by person when business is transferred as a going concern to another person. Consequently, based on the judicial views under Sales tax or VAT regime, it can be safely argued that GST may not be applicable on Slump Sales considering “business as a going concern” to be outside the scope of section 7 i.e. scope of “Supply”.

It will not be out of place to state that section 18(3) of CGST Act read with Rule 41 of CGST Rules provides for availability of input credit on transfer of business which remain unutilised in electronic credit ledger of the transferor by submitting return in Form ITC-02. However, any unutilised balance in electronic cash ledger of the transferor will have to be claimed as refund by the transferor. Such provisions will equally apply to a case of transfer of business as going concern.

Section 22(3) of CGST Act also contemplates a situation of transfer of business on account of succession or otherwise to another person as a going concern and makes it obligatory that the transferee must obtain registration under with effect from date of such transfer i.e. before the agreement for transfer of assets is executed.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]


Every fiscal statute provides power to the officer for inspection of the records to ascertain the proper payment of tax. These measures are provided in the statute to prevent the evasion of tax. All the Act, Income Tax Act, Erstwhile Central Excise Act and Customs Act, Every State Law and Now Goods and Services Tax Act makes provision relating to inspection, search and seizure. The Sections 67 to 72 of GST Act makes provision in this regard. The provisions under these sections along with the general principle in this regard based on judgments rendered in context of provisions in other statute are discussed as under:


1. Access to Business Premises

2. Power to Inspection, Search and Seizure

3. Inspection of goods in movement

4. Power to summons to give evidence

5. Power to arrest

6. Other officers to assist

Access to Business Premises

Section 71 of the GST Act, any officer not below the rank of Joint Commissioner as authorised by proper officer shall have access to any business premises to inspect books of account, documents, computers, computer programmes, computer software and such other things which may require. The purpose of having access to business premise is carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

This section further provides that the person in charge of the premises shall on demand made by authorised officer or by the Audit Party or by cost Accountant or Chartered Accountant nominated under section 11 provide the following:

(i) The records as prepared or maintained by the registered person and declared to the proper officer as may be prescribed

(ii) Trial balance or its equivalent;

(iii) Statements of annual financial accounts, duly audited, wherever required;

(iv) Cost audit report, if any, under section 148 of the Companies Act, 2013 (18 of 2013);

(v) The income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961); and

(vi) Any other relevant record.

The above records will be presented for scrutiny by authorised person within a period not exceeding fifteen working days from the date when such demand is made or further period as may be allowed Joint Commissioner.

Power to Inspection, Search and Seizure

The power of the authorised person to inspect, search and seize the goods or documents are provided in Section 67 of the GST Act. These are discussed below:-

(a) Power to inspection

(b) Search and Seizure

(c) Return of seized goods

(d) Applicability of code of criminal procedure

(e) Seizure of account, register etc.

(f) Purchase of sample

Power to Inspection

The clause (1) of the Section 67 provides that when proper officer not below the rank of Joint Commissioner has reasons to believe that: A taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made hereunder to evade tax under this Act; or

(a) Any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act. He may authorise in writing to the officer to inspect any place of business of taxable person or the persons engaged in transportation of goods or owner or operator of warehouse or go down.

Thus, the officer shall have reason to believe about suppression of information leading to suppression of tax amount. The identical word appears in Section 132 of Income-tax Act. The various authorities have interpreted the said words “reason to believe” in various judgments. These are discussed below:

• Has reason to believe – The words “has reason to believe” in section 132(1) postulate belief and existence of reasons for that belief. The belief must be held in good faith: it cannot be merely pretence. It does not mean a purely subjective satisfaction of the officer ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC)].

The expression “reason to believe” is both subjective and objective but the area of objectivity is limited. Its existence is subject only to a limited scrutiny and the court cannot substitute its own opinion for that of the authority specified in the section [Balwant Singh v. R.D. Shah, (1969) 71 ITR 550, 562 (Delhi).

Formation of belief – The formation of the belief within the meaning of section 132(1) is an important step and a condition precedent to the authorisation of search and seizure. It is nevertheless basically a subjective step. It is one essentially making up one’s mind as to whether on the information presented he had or had not formed the reason to believe. This belief, of course, cannot be a mere pretence nor can it be a mere doubt or suspicion. It is something much more than that. Section 132(1), in its opening paragraph, speaks of “reason to believe” and not “reason to suspect or reason to doubt”. “Reason to believe” is thus a higher test to be fulfilled. It is, however, not necessary for the authorising authority to reach that belief by a process akin to judicial process. His reasons and his belief do not constitute a judicial or quasi-judicial act nor is issue of authorisation a judicial or quasi-judicial function. And the matter, though to an extent justifiable, extremely limited and circumscribed are the court’s power of scrutiny and review in that behalf. One may not like the belief of the authorising authority.

But if the belief is bona fide, if the same is in good faith, if it is not a pretence and if it is cogently supported by the information, the Court will not interfere therewith or sit in appeal over it. Indeed there would, in such circumstances, be no jurisdiction to interfere [Jain & Jain v. Union of India (1982) 134 ITR 655, 661-62 (Bom.)

• The principle for determining the reason to believe can be summarized as below:

(a) The authority must be in possession of information and must form an opinion that there is reason to believe that the article or property has not been or would not be disclosed for the purposes of the Act.

(b) The authorised person must on the basis of information with him shall form opinion whether there is reason to believe or not.

(c) The opinion must be based on the material which is available and it should not be formed on the basis of extraneous or irrelevant material.

(d) The court would examine whether the authorised person had material before it on which he could form the opinion whether there is rational connection between the information possessed and the opinion formed.

(e) The court cannot go in to the question of aptness or sufficiency of the grounds upon which the subjective satisfaction is based.

Communication of the reason to the person is not necessary as there is no provision in the Act which requires the reasons to be communicated to the person.

Authorisation should be in writing and shall provide the same and address and place of business of the taxable person or the person engaged in business of transporting goods or owners of operator of the warehouse or any other place.

2. Search and Seizure

Sub-section (2) provides that either pursuant to an inspection carried out or otherwise the officer not below the rank of Joint Commissioner has reason to believe that any goods is liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorize in writing any other officer to search and seize or may himself search and seize such goods, documents or books or things

As per rule 139( I ),such authorisation shall be issued in form GSTINS-01 Thus, the premises can be searched as result of inspection if it is ascertained that goods are liable for confiscation or any documents is relevant for any proceeding under the Act are hidden in premises. The seizure of goods and documents are normally made by drawing of panchnama. The list of documents or goods are specified in the panchnama. As per Rule 139(2) the Proper Officer shall make an order for seizure in Form GSTINS-02. Sub-section (5) further provides that the person shall be entitled to make copies of the documents or take extract of the documents. The officer undertaking the search has power under sub-section (4) to seal or break open the door of any premises or to break open any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed, where access to such premises, almirah, electronic devices, box or receptacle is denied. Thus, search of the premises can be made either as the result ol inspection or otherwise.

First proviso to sub-section (2) of section 67 provides that where it is not practical to seize any goods, the proper officer or any officer authorised by him may serve on the owner or custodian of goods an order that he shall not part with or otherwise deal with the goods except with the permission of such officer. Such order shall be served in form GSTINS-03 as provided in rule 139(4).

Second proviso to section 67(2) provides that the document or books which have been seized shall be retained by the proper officer only if it is necessary for the examination and enquiry or proceedings. Normally, after seizure of books or documents, the proper officer will examine the records and thereafter the officer take statement on oath from the relevant person. Complete enquiry results in serving of show cause notice under section 73 or section 74. The show cause notice refers to the documents which are relied upon for alleging recovery of the amount.

As per section 67(3) after issuance of show cause notice all documents which are not relied shall be returned back to the taxable person within a period not exceeding 30 days from the date of issue of show cause notice. Thus, it creates obligation on the part of the officer to ensure that the documents have been returned back.

As per Rule 139(3) the Proper Officer shall provide custody of such goods or things for safe upkeep to the person.

3. Return of seized goods

Sub-section (7) provide that any seized goods shall be returned if no notice in respect thereof is given within six months of the seizure. The goods shall be returned to the person from whose possession they were seized. The period of six months can be extended for a further period not exceeding six months.

Sub-section (8) of section 67 empowers the Government having regard to perishable, hazardous nature of goods, depreciation in view of goods with passage of time, constraints for storage of space for goods etc., specify that the goods which have been seized shall be disposed of by proper officer. Rule 141 provides that where the goods are of perishable or hazardous nature and if the taxable person pays—

(a) Amount equivalent to market price: or

(b) The amount of tax, interest and penalty whichever is lower

Such goods shall be released forthwith by an order in Form GST-INS-1 on proof of payment. However, where the taxable person fails to pay the amount in respect of such goods the Commissioner shall dispose of the goods. The amount realised thereby shall be adjusted against tax, interest, penalty or any other amount in respect of such goods.

PROVISIONAL RELEASE – Section 67(6) specifically provides that the seized goods shall be provisionally released upon execution of bond and furnishing of security. The bond to the extent of value of goods is required to be executed which is supported by bank guarantee. However, in case the taxable person accepts the contravention, he may pay tax, interest and penalty and obtain release of goods permanently.

As per Rule 140 applicants seeking release of goods provisionally shall execute bond in Form GSTINS-04 for the value of goods. He shall furnish security in the form of bank guarantee equivalent to the amount of tax, interest and penalty. The explanation given in rule 140(1) provides that applicable tax shall include central tax and state tax or central tax and union territory tax, cess payable under Goods & Services Tax Compensation to States) Act 2017. It is the responsibility of the person to whom the goods are released provisionally to produce the goods on the appointed date at the place indicated by the proper officer. In case the goods are not produced, security furnished by the applicant shall be encashed and adjusted against tax, interest, penalty and fine payable in respect of goods.

Applicability of code of criminal procedure

Sub-section 67(10) provides that the provision of code of criminal procedure relating to search and seizure shall apply to search and seizure under this Act. It is provided that the only modification in the provision contained in code is that the word “Magistrate” appearing in Section 165(5) of code of criminal procedure shall be replaced with Principal Commissioner/Commissioner of CGST/Commissioner of SGST.

Section 165 of Code of Criminal Procedure, 1973 specifies the procedure ol making search and seizure. As per sub-section (3), if the police officer is unable to conduct the search of person, he shall require any officer subordinate to him to make the search. The officer shall deliver to such subordinate an order in writing specifying the place to be searched and as far as possible, the thing for which search is to be made. Subordinate officer shall thereupon search things mentioned in the order. Sub-section (5) further provides that the copies of record shall be sent to the nearest Magistrate, empowered to take cognisance of the offence, and to the owner or occupier of the place on application, be furnished free of cost. The proper officer shall draw panchnama at the time of withdrawing of record after the search. The Panchnama must mention the details of record or goods seized by the officer. The copy of the same shall be provided to the jurisdictional Commissioner.

Seizure of account, registers etc.

Sub-section (11) of section 67 authorises the proper officer for reason to be recorded in writing to seize accounts, registers, documents etc. which are produced before the officer if he has reason to believe that such person has evaded or has made an attempt to evade taxes. Thus, during scrutiny of records or any other proceedings, the documents are produced before the proper officer and on examination he finds that the person has evaded the tax or is trying to evade tax, he may seize such documents and provide receipt for the same. The documents shall be retained as long as it is necessary for the purpose of examination.

This section also cast obligation on officer to substantiate that he has reason to believe that any person has evaded tax or attempting to evade tax. The reasons shall be based upon documents which have been produced before him.

Purchase of sample

As per section 67(12), the Commissioner or any officer authorised by Commissioner may cause purchase of any goods or services from the licenced premises of any taxable person to check whether taxable person issues tax invoice or bill of supply or not. Alter examination, if the Commissioner find that tax invoice or bill of supply has been issued, he may return to the taxable person. On returning the goods, the taxable person shall refund the amount after cancellation of tax invoice or bill of supply. This section further authorises the Commissioner to specifically make discreet enquiry about issuance of tax invoice or bill of supply by the taxable person.

Inspection of goods in movement

Section 68 provides that the Central or State Government may require the person in-charge of a conveyance carrying any consignment of goods exceeding such amount as may be specified to carry the prescribed documents. The said document shall be presented to proper officer at the time of verification of vehicle during the search. The officer may detain the vehicle if such documents are not produced for further investigation.

Power to summons to give evidence

Section 70 of GST Act provides that proper officer shall have power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry which such officer is making for any of the purposes of this Act. Such inquiry will be in the same manner as provided in the case of Civil Court under the provisions of the Code of Civil Procedure, 1908.

Further sub-section (2) provides that it will be deemed to be “judicial proceeding within the meaning of Sections 193 and 228 of the 1PC.

Ratio of judgments under other Acts

The provision relating to power to issue summons are also provided in Central Excise Act and Custom Act. The ratio of many judgments rendered under those Acts are equally applicable to the provisions contained in GST Act also. These are summarised below:

SUMMONS SHOULD BE ISSUED ONLY WHEN INFORMATION CANNOT BE OTHERWISE EASILY OBTAINED – It is observed that summons is issued merely to obtain information or documents. Such information/documents can easily be obtained by telephonic request or writing letters. Harsh and legal language of summons causes unnecessary mental stress and embarrassment and instills fear. It may also become source of harassment or unethical practices. Hence, issue of summons should be resorted to only when above modes of communication are found ineffective or when it is essential to ensure personal presence of the person concerned to lend evidence or record statement. Summons should be issued after prior written permission of officer not below rank of Assistant Commissioner (earlier it was Deputy Commissioner) with reasons to be recorded in writing. If it is not possible to obtain written permission, oral/telephonic permission should be reduced in writing and intimated to the concerned officer. Where summons has been issued, officer issuing summons must submit a report of proceeding and ensure that no harassment is caused – CBE&C instruction F No. 137/39/2007-CX-4 dated 26-2-2007 [6 STR C25] – similar instruction* in MF(DR) Instruction No. 207/07/2014-CX.6 dated 20-1-2015.

Summons should BE issued to MD/Highest executive only in rare situations – Summons should not be directly issued to MD/Highest Executive. He may not be aware of all the details. Company can depute person who has full knowledge as its authorised representative. Summons should be issued to the authorised person of company who is’ acquainted with the case. Though enquiry officer has right to summon Managing Director or General Manager, he should not summon them unless required for enquiry – Sudhir Deoras v. CCF. (2012) 284 ELT 32o (Jhar HC DB).

SUMMONS FOR DOCUMENTS SHOULD SPECIFY THE DOCUMENTS CALLED – Summons for producing documents should specify which documents are required. Authority issuing summons should apply his mind with regard to necessity to obtain and examine documents mentioned in the order. – Barium Chemicals v. A. J. Rana – AIR 1972 SC 591 – in this case, summons was set aside on ground of vagueness. All documents pertaining to appellant were called, which were in custody of Registrar of Court and also those which had no bearing on the matter.

All useful and relevant documents to be produced – A person is bound to produce all useful and relevant documents asked. In UOI v. Telco 1997 AIR SCW’ 4262 = AIR 1998 SC’ 287 = 96 ELT 209 (SC), it has been held that Assistant Commissioner is entitled to call tor and examine whatever documents he considers relevant.

PROVISIONS REGARDING TAKING A STATEMENT – Statement can be recorded during such enquiry. It should be recorded before a Gazetted Officer. (Superintendent is the lowest rank of Gazetted Officer in excise department. Inspector is not a Gazetted Officer). Such statement can be used against the person during any legal proceedings. Statement should be signed by the person – Amba Lalx. UOIAIR 1961 SC 264 = 1984(13) ELT 1321′(SC).

The statement should be in writing and signed by the maker, as it safeguards interests of the maker as well as department and eliminates the possibility of making a complaint subsequently that the statement was not correctly recorded by the authorities – C. Sampath Kumar v. Enforcement Officer 96 ELT 511 = (1998) 92 Comp Cas 313 (SC).

Statement should be voluntary -Excise officer cannot compel a person to give incriminating statement without reasonable, care and just procedure. Statement should be voluntary and not under threat. However, a warning that giving false evidence will attract penalty under section 193 of Indian Penal Code does not amount to threat and that provision is made in the statute itself.

No right of silence – Section 14(2) of CEA and section 108(3) of Customs Act specifically provide that all persons summoned shall be bound to speak the truth upon any subject respecting which they are examined and to produce such documents and other things as may be required.

No right to advocate’s presence – In Poolpandi v. Superintendent, C. Ex. (1992) 62 Taxman 447 — AIR 1992 SC 1795 = 60 ELT 24 = 75 Comp Case 504 = (1992) 3 SCC 259 = 1992 AIR SCW 2012 (SC 3 Member Bench) it has been held that person being interrogated is not an accused nor can he plead that there is a possibility of his being made an accused in future. Hence, he has no right to ask for his Advocate’s presence during the enquiry. Interrogating officer may permit presence of advocate end even in such case, the advocate cannot interrupt the investigations. This decision is applicable in all matters under Customs Act, FEMA Income-tax etc.) – quoted with approval in Ajiital Mohammad Ami.) Kasah v. Stale of Maharashtra (2012) 9 SCC 1.

In Senior Intelligence Officer v. Jugal Kishore Samra(2011)12 SCC 362 270 ELT 147(SC), it was reiterated that Advocate cannot be present at the interrogation. However, in this case, considering medical condition, it was ordered that interrogation may be held within sight of his advocate/authorised person seated not within hearing distance. No consultation will be allowed during interrogation.

Legal Representation

Normally representation through a lawyer in any administrative proceeding is not considered an indispensable part of the rule of natural justice as oral hearing is not included in ‘he minima of fair hearing. N Kalindi v. Tata Locomotive & Engg. Co A.I.R 1960S.C.914. This denial of legal representation is justified on the ground that lawyers tend to complicate matters, prolong the proceedings and destroy the essential informality of the proceedings. It is further justified on the ground that representation through a lawyer of choice would give an edge to the rich over the poor who cannot afford a good lawyer. No research has so far been made to test the truth of these assertions, but the fact remains that unless some kind of legal aid is provided by the agency itself, the denial of legal representation, to use the words of Professor Allen, would be a ‘mistaken kindness’ to the poor people.

To what extent legal representation would be allowed in administrative proceedings depends on the provisions of the statute. Factory laws do not permit legal representation, Industrial Disputes Acts allow it with the permission of the Tribunal and some statutes like the Income tax Act permit legal representation as a matter of right.

Right to legal representation through a lawyer or agent of choice may be restricted by a standing order also. In Crescent Dyes and Chemicals Ltd. v. Ram Naresli Tripathi. (1930 2 SCC 115, the Supreme Court held that where a standing order restricted the right of representation to any employee of the factory only it would not be considered as a denial of natural justice as to vitiate an administrative enquiry. However, courts in India have held that in situations where the person is illiterate, James Bushi v. Collector of Ganjam, AIR 1959 Ori 152 or the matter is complicated and technical. Natya Ranjan v. State, AIR 1962 Ori 78or expert evidence is on record. Harishchandra v. Registrar, Co-op. Societies, (1966) 12 FLR 141 (MP) or a question of law is involved James Bushi v. Collector of Ganjam, AIR 1959 Ori 152 or the person is facing a trained prosecutor, C.L. Subramaniam v. Collector of Customs, (1972) SC 2178 some professional assistance must be given to the party to make his right to defend himself meaningful.

It is relevant to note at this stage that the Supreme Court in M. H. Hoskot v. State of Maharashtra (1978) 3 SCC 544: AIR 1978 SC 1548. while importing the concept of ‘fair procedure’ in Article 21 of the Constitution held that the right to personal liberty implies provision by the State of free legal service to a prisoner who is indigent or otherwise disabled from securing legal assistance where the ends of justice call for such service.

In Khatri v. Stale of Bihar (1981) 1 SCC 627: AIR 1981 SC 928, the Supreme Court further ruled that the State is Constitutionally bound to provide legal aid to the poor or indigent accused not only at the stage of trial but at the time of remand also. Such right cannot be denied on the ground of financial constraints or administrative inability or that the accused did not ask for it, the Supreme Court emphasized

In case of Nandint Satpathy v. P.L Dani (1978) 2 SCC 424: AIR 1978 SC 1025, the Court held that the accused must he allowed legal representation during custodial interrogation and the police must wait for a reasonable time for the arrival of a lawyer. However, the Court, who took the right step, did not take a long stride in holding that the State must provide a lawyer if the accused is indigent. The observation of the Court could well be inducted in the administration. In the area of criminal justice the Criminal Procedure Code now provides for legal aid to the accused.

Legal assistance in preventive detention cases poses a curious problem because on the one hand preventive detention laws disallow legal representation and on the other they seek to detain people for unproved crimes. However, it is gratifying to note that in this highly-sensitive area, judicial behaviour has shown some remarkable signs of improvement. In Nandlal Bajaj v. State of Punjab (1981) 4 SCC 327 AIR 1981 SC 2041, the Court allowed legal representation to the detainee through a lawyer, even when Section 11 of the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act. 1980 and Section 8(e) of the COFEPOSA, 1974 denied legal representation in express terms, because the State had been represented through a lawyer. The Supreme Court observed that even when the law does not allow legal representation to the detenu, he is entitled to make such a request and the advisory board is bound to consider this request on merit, and the Board is not precluded to allow such assistance when it allows the State to be represented through a lawyer. Maintaining the same tenor, the court in A. K. Roy v. Union of India (1982) 1 SCC 271 : AIR 1982 SC 710 while deciding the constitutionality of the Nation Security Act, 1980 held that if the Act disallows legal representation to a detenu, the State also cannot take the help of a lawyer. In its eagerness to protect the interest of the detenu, the court in Phillippa Anne Duke v. State of Tamil Nadu(1982) 2 SCC 389 AIR 1982 SC 1178 and Devji Vallabhai Tandel v. Administrator, Goa, Damanand Diu (1982) 2 SCC 222: AIR 1982 SC 1029, conferred upon him the right to appear through his friend who in truth and substance is not a legal practitioner, and is also not a comrade-in-profession of the detenu for which he is detained. Therefore, even in the face of Constitutional and statutory denial of legal representation to a detene, he is entitled to a common law right of representation through a ‘friend’ ID., p. 1238 (AIR).

In USA, a person has a right to legal representation which is guaranteed by the combined effect of the ‘Due Process’ clause of the Constitution and Section 6(a) of the Administrative Procedure Act. 1946.

In England, ordinarily, the right to be represented by a lawyer is not included in the principles of fair hearing. But where there is a right to appear in person or a technical matter of law and fact is involved, the denial of legal representation is considered as an antithesis of fair hearing. R. v. St Mary Assessment Committee, (1891) 1 QB 378 : Pett v. Greyhound Racing Assn., (1968) 2 WLR 1471. The Franks Committee has also recommended that the right of legal representation should not be curtailed save in exceptional circumstances.

Statement should be taken during reasonable time – Normally, statement should be recorded during working hours, but if the circumstances demand, interrogation and examination can be done in night. Statement should be completed as soon as possible after the search.

In many cases, the search and statements continue the whole night and even next day. This is humanly torturous and really assessee can refuse to give statement beyond a reasonable period and say that he will continue his statement after getting reasonable rest (However, generally, people are too scared to do this). Really confinement of a person beyond reasonable time is unlawful arrest of a person.

Taking statement continuously for two days is violation of human rights – in CCF v. State of Bihar [2012] 18 70 (Patna), has indeed rightly held that Continuous interrogation/recording of Statement till late night on second day of search is violation of human right.

No summons after show cause notice is issued – Summons can be issued for making an enquiry for ascertaining whether any offence has been committed. If the show cause notice has been issued, it means that the investigation/enquiry has been completed and no summons can be issued.

Accepting duty liability in statement does not mean acceptance of liability by company – Even if duty liability is accepted while making statement, it does not mean company cannot challenge duty liability These cannot be stopped in matters of taxation – Dodsal P Ltd. v. CCE 2006 (193) ELT 518 (CESTAT).

Power to arrest

Section 69 of the GST Act provide that the Commissioner can arrest the person, it he has reason to believe that the person has committed an offence punishable under Clause (i) or (ii) of sub-section (1) or under sub-section (2) of Section 132. The provision regarding manner of arrest, granting of bail and related judgments are discussed in Chapter 31.

Other officers to assist

Section 72 provides all officers of Police, Railways, Customs and those officers engaged in collection of land revenue including village officers, officers of state and union territories are here bv required to assist the proper officers in the execution of this Act. The Government may issue notification regarding other class of officers to assist the proper officer in execution ol provisions of this Act.

Publicity of Search Cases in the Media

Should the existing practice of giving wide publicity of search in the media be continued, is another controversial issue. The Department’s view is that such publicity is necessary for creating a deterrent effect and is also not prohibited by law. On the other hand, the search casts a slur on the party searched and adversely affects his credit and business standing. In para 3.24 of the Report of the Kelkar Panel, it was recognized that “the social and economic cost of search and seizure activity is very high.” The Report goes on to add, “The concealed income is widely publicised but in judicial proceedings the additions made on that basis are not sustained.” It is high time this practice is stopped for which, in suitable cases, exemplary damages in torts be claimed and law on the subject developed in accordance with the requirements of protecting human rights.

Can the Office Premises of the Assessee’s Tax-representatve be visited?

Sometimes, not finding the account books at the assessee’s business premises and knowing their existence at his tax-representative’s office, the temptation is to visit his office. This is not permitted. Board’s Circular No.7-D (LXIII-7 of 1967) dated 3rd May 1967 clearly prohibits the visit to the assessee’s residential premises or the office premises of his chartered accountant or advocate. The authorised representative should, on being asked to produce the account books, do so or make them over to the assessee with the prior knowledge of and in his presence the income-tax authority.


Power of Search & Seizure

In M.P. Sharma v. Satish Chandra, District Magistrate 1954 AIR 300; (1954) 2 ELT 287 (SC). It was held that power of search and seizure in any system of jurisprudence is an overriding power of the State to provide security and that power is necessarily regulated by law.

In Parekh Prints v. Union of India (1992) 62 ELT 253; (1991) 59 (Delhi), it was held that when a statute is constitutionally valid and its language is clear, there is no scope to refer to the objects and reasons of the enactment or deliberations in the Parliament to interpret the provisions of the Act concerned. The High Court held that when the party concerned had collected additional duties of excise from the ultimate consumers and had not repaid the same to the credit of the Central Government they cannot be permitted to make a profit at the cost of public revenue. Therefore, the petitioners must restore the advantage they had got to the detriment of the public revenue, due to the interim orders passed during the pendency of the matter, and to which advantage they were not entitled.

In Dr. Nalini Mahanjan v. Director of Income Tax (Investigation) and Others, (2002 257 ITR 123 (Delhi), it was held that if the requirements of a statute which prescribe the manner in which something is to be done it shall be done in such a manner and in no other manner. Therefore, the search and seizure ordered by the authority concerned cannot be held to be valid, as the proceedings for passing such an order had not been followed.

In G.K. International v. Union of India (2008) 230 ELT 590 (Punjab & Haryana), since the investigation was continuing and the adjudicating authority had not determined any amount to be due and payable by the petitioner, it was held that the department had no legal or moral right to retain the amount deposited by the writ petitioner when no demand had been raised. As such, the department had been directed to refund the amount, along with the copies of the Panchnama drawn during the search and seizure, the other records and data collected from the petitioner.

In Chitra Construction Co. v. Addl. Commercial of C, CE & ST. Coimbatore (2013) 31 STR 385 (Madras), it was held that if there were some materials available for a reasonable and prudent man to believe the search was warranted, then High Court will not delve deeper into subtle and complex intricacies involved in process of formation of opinion in mind of concerned authority.

In V.V.V.R. Sathyam v. The Superintendent (STU) (2013) 29 STR 214. (2012) 276 ELT 318 (Madras), it was held that ‘search and seizure’ is not a new weapon in the armory of those whose duty is to maintain social security it its broadcast sense. The process is widely recognised in all civilised countries. A search and seizure is only a temporary interference with the right to hold the premises searched and the articles seized. Therefore, it cannot be a violation of the provisions of Article 19(1) of the Constitution of India.

Concept of ‘Reason to Believe’

In S. Narayanappa and Others v. Commissioner of Income Tax, AIR 1967 SC 523, it was held that it would be open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not irrelevant or extraneous to the purpose of section 34 of the Income Tax Act, 1922.

In Balwant Singh and Others v. R.D. Shah, Director (1969) 71 ITR 550 (Delhi), it was held that the information gathered as a result of illegal search and seizure can be used subject to the value to be attached to it or its admissibility, with regard to the law relating to evidence. However, the authority concerned should have information in his possession to give him are reason to believe that action under section 132 of the Income-tax Act, 1961, was necessary.

In ITO v. Seth Bros (969) 74 ITR 836 (SC), it was held that but where power is exercised bona fide and in furtherance of the statutory duties of the tax officers any error of the judgment on the part of the officers will not vitiate the exercise of the power. Reason to believe cannot be arbitrary, capricious or whimsical.

In Chhugamal Rajpatl v. S. P. Chaliha and Others, AIR 1971 SC 736 (SC), the Supreme Court had held that the report of the Income Tax Officer did not set out any reason for coming to the conclusion that it was a fit case for issuing of a notice, under section 148 of the Income-tax Act, 1961. The material that he had before him for issuing the notice under section 148 of the Act, had not been mentioned in the report. He had not mentioned the facts contained in the communications received by him, based on which he had issued the notice. A vague feeling that the transactions may be bogus in nature would not be sufficient for arriving at a decision for issuing such a notice.

In H. L. Sibal v. Commissioner of Income Tax, (1975) 101 ITR 112 (P&H), it was held that the facts constituting the information for the authority concerned to have a reason to believe that a search was necessary must be relevant to the enquiry. They must be such from which a reasonable and prudent man can come to a requisite belief or conclusion. If the said elements are missing, the action of the authority should be struck down on the basis of ‘legal malice’. It had also been held that, due to the applicability of section 165 of the Criminal Procedure Code to the searches and seizures, by virtue of sub-section (13) of Section 132 of the Income-Tax Act, 1961, the taxpayer has been provided with certain important safeguards against arbitrary action, as held by the Supreme Court in Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver, (1967) 66 ITR 664.

In ITO v. Lakshman Mewal Das (1976) 103 ITR 437 (SC), it was held that the belief must be genuine and not a mere pretence, and has to be held in good faith and not a reason to suspect.

In Ganga Saran Sons Pvt. Ltd. v. ITO (1981) 130 ITR 111 (SC), it was held that the belief of the assessing authority is mandatory, reasons to believe is stronger than being satisfied. The belief entertained by the assessing officer must not be arbitrary or irrational and it must be reasonable.

In ACC v. Rasikal Chimanlal Shah (1995) 77 ELT 835 (CESTAT, Calcutta-DB), it was held that in search and seizure process, ‘reason to believe’ is important. The reason to believe is a pre-condition for exercising search power. Such a belief must be at the time of power and not at a subsequent state. [Also see: Shantilal Mehta v. Union of India (1983) 14 ELT 1715 (SC)].

In Dr. Partap Singh and Another v. Director of Enforcement, Foreign, Exchange Regulation (1985), AIR 989 (SC) It was held that the expression ‘reason to believe’ is not synonymous with the subjective satisfaction of the officer. The belief must be held in good faith and it cannot merely be pretence. It is open to the Court to examine the question to the limited extent whether the reason for the belief has a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section.

In State of Gujarat v. Shri Mohanlal Jitamljiporwal and Another CDJ (1987) SC 280; (1987) 29 ELT 483 (SC), it was held that “The circumstances have to be viewed from the experienced eye of the officer, who is well-equipped to interpret the suspicious circumstances and to form a reasonable belief in the light of such circumstances. The Supreme Court had stated an economic offence is committed with cool calculation and deliberate design, with an eye on personal profit, regardless of the consequences to the community. A disregard for the interest of the community can be manifested only at the cost of forfeiting the trust and faith of the community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest.”

In Indru Ramchand Bharvani and Others v. Union of India and Others. CJ (1988) SC 247; (1992) 59 ELT 201; (1998) 601 (SC), it was observed that the gist of the two sections, namely, sections 110 and 123 of the Customs Act, 1962, is that there must be materials to form a reasonable belief that the goods in question are smuggled. The officer concerned should have a reasonable belief that the goods in question are smuggled goods. The Court cannot sit on appeal on the formation of such a belief by the officer concerned.

In Nenmal Shankarlal Parmer v. Assistant Commissioner of Income Tax, (Investigation) (1992) 195 ITR 582 (Karnataka), it was held that the search proceedings could be challenged and held to be invalid on the ground that no proper information was available for issuing the search warrant. Further, assessee had submitted that if any proceedings had been initiated based on incorrect information, it could be categorised as ‘legal malice’, as held in H. L. Sibal v. Commissioner of Income Tax; (1975) 101 ITR 112 (P&H).

In L. R. Gupta v. Union of India (1992) 194 ITR 32 (Delhi), it was held that ‘reason to believe’ should be backed by adequate material and not based on whims and assumption. ‘Reason to believe’ is wider than ‘reason to suspect’.

In Union of India v. Shyamsunder, (1994) 74 ELT 197 (SC), the Apex Court had reiterated that whether or not the officer concerned had entertained a reasonable belief under the given circumstances is not a matter which can be placed under a legal microscope, with an over indulgent eye which sees no evil anywhere within the range of its eye sight. The circumstances have to be viewed from the experienced circumstances and to form a reasonable belief in the light of such circumstances.

In Praful Chunilal Patel v. Assistant CIT (1999) 5 DTC 270 (Gujarat); (1999) 236 ITR 832 (Gujarat), it was held that the words, reason to believe cannot mean that assessing officer should have finally ascertained the fact by legal evidence, they mean that he forms a belief on the basis of examination he makes and if he likes, from any information that he receives.

In Mapsa Tapes Pvt. Ltd. v. Union of India (2006) 201 ELT 7 (P & H), it was held that power of search and seizure has to be concealed in the larger interest of the society and to check evasion of tax. Exercise of power of seizure is liable to be struck unless ‘reason to believe’ were duly before action of search and seizure was taken. The search and seizure was declared illegal where nothing was produced before the Court to show as to whether reason were recorded or not before search was authorised or seizure took place.

In Jai Hotels Co. v. ADIT (2009) 184 Taxman 1 (CESTAT, Bombay-DB), it was held that a change in opinion is not a reason to believe. If there is no new material, then a mere change of opinion is not a ‘reason to believe’.

In CIT v. Kelvinator India Ltd. (2010) 320 ITR 561 (SC), it was held that there must be tangible material for the formation of the belief in the context of search.

In Y. J. Enterprises v. Commissioner of Customs, Chennai (2017) 350 ELT 383 (Madras), it was held that the Customs Officer can seize an article only when he has reason to believe it is liable to confiscation. The expression reason to believe has been defined in the Indian Penal Code as follows:

“A person is said have ‘reason to believe’ a thing, if he has sufficient cause to believe that thing but not otherwise.”

The expression ‘reason to believe’ is distinct from ‘reasonable believe’ and ‘suspicion’. The Customs Officers cannot also act in haste and spoil the export possibilities of an exporter by indiscriminately seizing the goods; based on mere suspension and surmise.


In Commissioner of Commercial Taxes v. R. S. Jhavar and Others, AIR 1988 SC 59 (SC), it was held that all searches must be made in accordance with the provisions of the Code of Criminal Procedure to the extent to which they may apply. Anything confiscated, based on a defective warrant, must be returned to the person concerned.

In Seth Durgaprasad Erc. v. H.R. Gomes (1983) 13 ELT 1501; (1966) 2 SCR 99 (SC), it was held that the object of the grant of power under section 105 of the Customs Act, 1962, is not to search for a particular document but for documents or things which may be useful or necessary for the proceedings, either pending or contemplated, under the Customs Act. 1962. At that state it would not be possible for the officer concerned to predict or to even know in advance what documents could be found in the search and which of them may be useful or necessary for the proceedings. It is only after a search is made and the documents found therein are scrutinised that before the power is exercised, the preliminary conditions required by the section must be strictly satisfied.

• In Abdul Rajah Haaji Muhammad v. Union of India (1986) 25 ELT 305; (1989) 455 (Bombay), it was held that even if a lawyer is present, he cannot interrupt the proceedings during the interrogation/investigation.

• In Southern Herbals Ltd. v. Director of Income Tax, (1994) 207 1TR 55 (Karnataka), it was held that the search warrant issued by the first respondent is not proper, as it had not been issued against any person. The warrant of authorisation must specify the person in respect of whom it is issued, as held. Further, the search of the premises of a partner of a company, firm or concern should have been specifically authorised, as held in Nenmal Shankarlal Parmer v. Assistant Commissioner of Income Tax. (1992) 195 ITR 582 (Karnataka).

• In Gian Castings Ltd. v, Union of India (1999)108 ELT 36 (P&H). it was held that visit by Central Excise Officers in the course of enquiry to cross-check some secret information does not tantamount to search or raid.

• In Harshvadan Rajnikant Trivedi Union of India (2014) 308 ELT 464 (Gujarat), where record/documents were seized under panchnama and assessee was demanding photocopies of seized records and documents and willing to bear cost thereof, it was held that such a request cannot be denied on ground that assessee was not cooperating in inquiry/investigation If assessee does not co-operate, they can be proceeded against ex parte It cannot be denied on basis of clause 55(m) of Central Excise Intelligence and Investigation Manual, which only confers certain right on assessee: time of search and seizure, and has no specific bar under which assessee can be denied photocopies of documents seized, and that too when they are willing to bear the cost.

• In Digipro Import & Export Pvt. Ltd. v. Union of India (2017) 353 ELT 3 (Delhi), where officers of anti-evasion team which had visited premises of assessee collected post-dated cheques on spot, it was held that ascertainment of duty and payment of such duty has to be preceded by orders in writing drawn up at the office of anti-evasion wing. It cannot and should not be ‘on the spot’. Conduct of team was held to be not acceptable. It was not part of their mandate to accommodate request of assessee and grant him indulgence of tendering undated cheques which they agree to hold over for possible encashment at a future date once his financial condition improved. [Also see: Digipro Import & Export Pvt. Ltd. v. Union of India (2017) 350 ELT 145 (Delhi)].

• In MGM Metallisers Ltd. v. Union of India (2016) 342 ELT 337 (Gujarat), it was held that search and seizure effected by the Central Excise Officers could not be held invalid mainly on the basis of the affidavits filed by the assessee alleging such search being with mala fide intent especially when such officers were duly authorised by the competent authority and no specific personal allegations were made against them. [Affirmed by Supreme Court as reported (201 7) 351 ELT A 179 (SC)].


• In CIT v. Tarsem Kumar (1986) 26 ELT 10 (SC), Apex Court held that seizure implies forcibly taking something from its owner or who has possession and who was unwilling to part with such possession. Seizure is taking into possession of goods in pursuance of a legal right.

• In Suhhas Dhanuka v. CCE (1998) 102 ELT 100 (CESTAT). it was held that seized documents should not be retained beyond 60 days if they are is relied upon in the departmental proceedings.

• In Indu-Nissan Oxo Chemical Industries Ltd. v. Commissioner of Customs (1998) 101 ELT 201; (1998) 256 (Madras), it was held that seizure under law means a deprivation of possession and not merely custody.

• In Naresh Kumar & Co. v. Union of India (2010) 28 STT 21; (2010) 19 STR 161 (Calcutta), it was held that revenue authority has no jurisdiction or authority to collect any amount at the time of raid, where it was alleged that on the date of search and seizure operation, it was compelled to hand over cheque of certain amount. Since there is no provision that one has to pay compulsorily tax in advance and also there was no ascertainment of liability, revenue department was to be directed to return principal amount of cheque to petitioner and also to return original books of account and records which had been seized.

• In Parmarth Iron Pvt. Ltd. v. CCE (2010) 255 ELT 496 (Allahabad), where the Department did not supply copies of all documents relied upon in the SCN and a final hearing was fixed and the petitioner was put to hardship since they were unable to cross-examine for want of copies, relying on the following decisions in favour of the petitioner.

M/s. Bhushan Sled Strips v. Union of India W.P (Tax) 249/2007 decided on 1-3-2007.

J &K Cigarettes Ltd v. CCS (2009) 242 ELT 189 (Delhi)

Union of India v. Ex. Constable, Amirk Singh (1991) AIR 564 (SC)

Roshanlal Agarwal v. Union of Indio (1994) 74 ELT 562 (Rajasthan)

The revenue was directed to return the non-relied upon documents to petitioners and to give inspection of documents seized for effective cross-examination.

• In Jatin Ahiya v. Union of India (2013) 287 ELT 3 (Delhi), where no show cause notice under section 110(2) of Customs Act, 1962 is issued within one year period (six months, if no extension is granted) after seizure of goods, it was held that upon the expiry of one year or six months, seizure ceases and seized goods are to be released unconditionally.

• In Manish Lalit Kumar Bavishi v. Addl. Director General, DRI (2013) 38 STT 116; (2012) 28 62; (2012) 27 STR 203 (Bombay), it was held that as per section 110(4) of Customs Act. 1962, it is mandatory for the department to make available the copies asked for. Choice of asking for document or seeking extract is of the party and not that of the Department. The Department is bound to make available the documents asked for. The Department had said that the copies would be supplied after completion of investigation which may be impacted by the assessee but copies were not provided.

• In Kishen S. Loungani v. Union of India (2017) 352 ELT 433 (Kerala), it was held that search or seizure or arrest of a person need not necessarily lead to prosecution. It may end in confiscation of goods, imposing penalty in adjudication proceedings or end up in compounding of offence.

Vide Finance Act, 2016, Sections 270A and 270AA have been inserted in the Income-tax Act w.e.f. 1-4-2017 i.e., A.Y. 2017-18 to provide for levy of penalty in the cases of under-reporting of income and misreporting of income and for grant of immunity in certain cases. Prior to insertion of aforesaid new sections penalty for concealment of income or for furnishing inaccurate particulars was leviable in accordance with provisions of section 271(1)(c) of Income-tax Act. Provisions of Sections 270A and 270AA have been inserted in the Act with a view to simplify the procedure and bring certainty in levy of penalty as there have been lot of litigation under old provisions. In this regard in the Memorandum it has been stated that:

“Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalise and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted Section 270A with effect from 1st April, 2017.”

Though the provisions have been inserted with a view to bring certainty but on going through the provisions it is observed that drafting has not been made with a view to bring clarity and certainty. There lot of confusion in the language and litigation is also likely to continue in regard to levy of penalty. In this regard following points can be made:

  1. Sub-section (1) provides for initiation of penalty proceedings by the Assessing Officer or the Commissioner (Appeals) or the Pr. Commissioner or the Commissioner during the course of any proceedings under this Act. Similar provision was there in section 271(1) of the Income-tax Act. Sub-section (12) also provides that penalty shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Pr. Commissioner, as the case may be. On going through the provisions of the section 270A of the Act it is evident that penalty is leviable with reference to under-reported income, which is to be determined with reference to income assessed or re-assessed. Further, reference has also been made to the order of assessment or reassessment under sub-section (3) of Section 143 or 147 of the Act. As per the scheme of the Act, order determining the income assessed or reassessed under Section 143(3) or Section 147 has to be passed only by the Assessing Officer and not by the Commissioner (Appeals), the Commissioner or the Pr. Commissioner. Therefore, it appears that reference to initiation of proceedings or imposition of penalty by the Commissioner (Appeals), the Commissioner or the Pr. Commissioner is redundant. Under the existing law penalty proceedings can be initiated by the Commissioner (Appeals) during the course of appeal proceedings before him and similarly proceedings can be initiated by the Commissioner or the Pr. Commissioner during the course of proceedings u/s. 263 of the Act. There would be no case under the Income-tax Act when the Commissioner (Appeals), the Commissioner or the Pr. Commissioner will pass the order determining the assessed income. Even the order pursuant to order of CIT(A) or CIT has to be passed by the Assessing Officer determining the income of the assessee as per the directions contained in the order of CIT(A) or CIT.

  2. Apart from the fact that assessed income is to be determined only by the Assessing Officer, as mentioned hereinabove, provisions of section 270AA of the Act also provides for making an application to the Assessing Officer. Further, the order granting the immunity from imposition of penalty is to be passed by the Assessing Officer only after the expiry of limitation period of filing appeal before Commissioner (Appeals) u/s. 249(2)(b) of the Act. Appeal before CIT(A) can be filed only against the order passed by the Assessing Officer. Therefore, as per the legal position there would be no case when the Commissioner (Appeals), the Commissioner or the Pr. Commissioner will initiate proceedings or will levy the penalty or would entertain application for granting the immunity.

  3. Provisions of section 270A of the Act has repeatedly made reference to “income assessed” for the purpose of determination of under-reported income. As mentioned hereinabove reference has also been made to order passed u/s. 143(3) of the Act or Section 147 of the Act. Section provides for levy of penalty with reference to under-reported income. It is intended that determination of under-reported income will be a simple process and the Assessing Officer will be able to determine the amount of under-reported income by comparing the income assessed or re-assessed with the income determined earlier on processing the return u/s. 143(1)(a) or in the preceding order. Therefore, it is likely that the Assessing Officer will immediately after passing the order of assessment determine the amount of under-reported income and would levy the penalty u/s. 270A of the Act. The amount of assessed income would go under change as a result of appeal / revision / rectification proceedings. There is no apparent indication in the provisions that penalty will be levied by the Assessing Officer only after the income has been determined pursuant to appeal or other proceedings. It has also not been provided that if penalty has been levied by the Assessing Officer immediately after passing the order u/s. 143(3) or 147 and subsequently in appeal proceedings if the addition or disallowances made in those orders are deleted then the quantum of under-reported income will consequently be amended by the Assessing Officer and revised penalty order will be passed deleting or reducing the quantum of penalty earlier levied. In case the intention was to simplify the process, it ought to have been provided in the section that either the penalty will be levied only after the final determination of amount of under-reported income, may be after adjudication of appeal by the tribunal or it ought to have been provided that the Assessing Officer at every stage will re-compute the amount of under-reported income and a revised order of penalty will be passed. In the light of provisions, as such, the assessee will have no option but to file appeal against the penalty order also in case he is pursuing the appeal against the assessment order.

  4. Under the provisions of section 271(1)(c) of the Act, the Assessing Officer was required to record satisfaction in the assessment order to the effect that the assessee has concealed the income or has furnished inaccurate particulars. There is no such requirement in provisions of section 270A of the Act. The amount of under-reported income is required to be determined straightaway on the basis of difference between the income determined on processing of return u/s. 143(1)(a) of the Act and income assessed or reassessed by the Assessing Officer, without going into the reasons for which additions have been made by the Assessing Officer. There are, however, further provisions in section 270A of the Act which would make the determination of amount of under-reported income cumbersome since in certain circumstances the difference in income may not be considered as under-reported income or in certain circumstances amount of under-reported income may be construed to be misreporting of income. The law ought to have provided that before initiating penalty proceedings the Assessing Officer shall apply his mind to hold that there is under-reported income and necessary satisfaction should have been recorded.

  5. Sub-section (3) of Section 270A of the Act provides for determination of under-reported income. Clause (b) provides that in a case where no return has been furnished, amount of under-reported income in case of a company, firm or local authority will be the amount of income assessed by the Assessing Officer. In case of other assessees, amount of under-reported income will be the difference between the income assessed and the maximum amount not chargeable to tax in the case. There can be a case where assessee has paid tax either by way of advance tax, tax deducted at source or tax on self assessment but for some reason return could not be filed by the assessee. It may be the position that on passing the order of assessment by the Assessing Officer, there may be no further tax liability found to be payable by the assessee since tax has already been paid. As per the language of clause (b) of sub-section (3) of Section 270A of the Act even in such a case the amount of income assessed or the difference between the income assessed and the maximum amount not chargeable to be tax will be considered to be under-reported income and penalty will be payable with reference to the same. The provision in this regard is illogical and exclusion ought to have been provided in such cases to the extent of income covered by the amount of tax already paid by the assessee.

  6. There is, virtually, duplication in the provisions of sub-section (2) and sub-section (3) of Section 270A of the Act. Sub-section (2) defines the circumstances in which an assessee will be considered to have under-reported his income. Sub-section (3) provides the basis for determination of under-reported income. Same basis and circumstances have been repeated in above sub-sections. It is stated that sub-section (2) could simply provide that an assessee will be deemed to have under-reported his income, if there is under-reported income in terms of sub-section (3) of Section 270A of the Act. Repeating of same thing in two sub-sections will only add to confusion and litigation.

  7. Sub-section (4) and sub-section (5) provides that in case there is any receipt, deposit or investment appears in the relevant assessment year and source of such receipt, deposit or investment is claimed to be an amount added to income in any year prior to assessment year under reference, penalty in respect thereof shall be leviable in case it has not been levied in the relevant earlier year. In regard to the provision following points can be made:

    1. Firstly, the meaning of the language that “amount added to income” is not clear. Whether it would include the amount added by the assessee himself in the revised return or offered for addition during the course of assessment proceedings also or it refers to only the addition made by the Assessing Officer in the order of assessment.

    2. In case the amount refers to the addition made by the Assessing Officer in assessment order for any earlier year, including the same in the amount of under-reported income in a subsequent year and levy penalty thereon is unwarranted, unjustified and uncalled for. Penalty is leviable pursuant to proceedings initiated during the course of assessment proceedings and same is to be levied considering the facts and circumstances of the relevant year. Penalty cannot be levied during the course of assessment proceedings for a subsequent year with reference to addition made by the Assessing Officer in an earlier assessment without reference to facts and circumstances of relevant assessment year in which the addition was made. In case the Assessing Officer had neither initiated the penalty proceedings in the relevant year nor had levied the penalty it cannot be levied in respect of the addition in any subsequent year.

  8. Provisions of clause (a) of sub-section (6) of section 270A provides that amount of income will not be included in the amount of under-reported income in case the assessee offers an explanation and the Assessing Officer is satisfied that the explanation is bona fide and the assessee has disclosed all material facts to substantiate the explanation offered. The aforesaid provision has shifted onus from the Assessing Officer to the assessee. Under the existing provisions of section 271(1)(c) of the Act, the onus was on the Assessing Officer who records the satisfaction and also substantiate his case that the assessee has concealed the income or has furnished inaccurate particulars. As per provisions of this clause the Assessing Officer at the first instance will determine the amount of under-reported income on the basis of difference between the assessed income and income determined u/s. 143(1)(a) of the Act. Thereafter, it is for the assessee to make submissions before the Assessing Officer and substantiate the contention that the claim was bona fide and he had disclosed all the material facts in respect of the same. Only if the Assessing Officer is satisfied that the explanation offered by the assessee is bona fide and he has disclosed all the material facts to substantiate the explanation offered, he would exclude the amount from the quantum of under-reported income. Accordingly, the provision provides a discretionary power to the Assessing Officer. Discretionary power to the Assessing Officer will defeat the intention of bringing certainty in the provisions and will lead to litigation. In this regard following points can specifically be made:

    1. The satisfaction of the Assessing Officer is a subjective matter. In spite of the explanation given by the assessee and giving all supporting evidence as regards the disclosure made, the Assessing Officer may hold that he is not satisfied and the amount cannot be excluded from the amount of under-reported income.

    2. The condition for satisfaction of the Assessing Officer is that the explanation offered by the assessee is bona fide. Again the issue will be there in what circumstances the explanation will be considered to be bona fide and in what circumstances same will be rejected by the Assessing Officer.

    3. There is further condition for the satisfaction of the Assessing Officer that the assessee has disclosed all the material facts to substantiate the explanation. This terminology again will lead to litigation. What disclosure will be necessary to satisfy the Assessing Officer will be a question of personal view of the Assessing Officer. The assessee may disclose the material facts but still the Assessing Officer may not be satisfied with the disclosure. Further, it is also important to mention in this regard that in the light of the facts that return of income is filed electronically there is a very limited option to make disclosure in respect of material fact for a claim being made by him in the return. Therefore, it will be quite difficult for the assessee to satisfy the Assessing Officer that he has disclosed all material facts in support of his claim or explanation.

    4. There may be many circumstances in which the claim is made by the assessee considering the factual or the legal position in regard to the claim. There is no specific provision made in the section to the effect that in case a claim has been made by the assessee based on some decision of the court, which may subsequently be reversed, the disallowance made in respect of the same is not to be included in the amount of under-reported income. Similarly, the assessee considering the facts of the case may consider that its claim is duly allowable. The Assessing Officer, however, may not agree with the claim of the assessee.

  9. Clause (b) of sub-section (6) of section 270A provides that the amount of under-reported income shall not include the addition made on the basis of an estimate if the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that income cannot properly be deduced there from. Again the scope of above clause is not free from controversy. Firstly, it is a matter of satisfaction of the Assessing Officer whether the accounts are correct and complete, which is always a matter of controversy. Further, this condition that accounts are correct and complete but method employed is such that income cannot properly be deduced there from will also give controversy. Normally, if the accounts are correct and complete, there is no question of estimating the income and the computation of income as made by the assessee should be accepted by the Assessing Officer. In case the Assessing Officer is of the view that correct income cannot be deduced from the accounts, it would mean that accounts are not correct and complete. In such circumstances he will resort to the estimation basis. Therefore, the provision made appears to be self-contradictory that though accounts are complete and correct but income cannot be deduced there from.

  10. Clause (c) of sub-section (6) of section 270A of the Act also provides that the amount of under-reported income will not include the addition made by the Assessing Officer on an estimated basis in a case where the assessee has made addition of a lower amount on estimated basis. There is again a condition attached herein that the assessee has disclosed all the material facts in respect of the addition or disallowance made by him on estimated basis. It will again be a question of litigation whether disclosure has been made by the assessee or not.

  11. Clause (d) of sub-section (6) of the section 270A is also to the effect that under-reported income shall not include the addition made on account of difference in Arm’s Length Price determined by the Transfer Pricing Officer when the complete information and documents as prescribed u/s. 92D have been maintained and disclosure of all material facts relating to the transaction has been made. This condition will again be a subject matter of litigation. Further, the exclusion has been provided only in respect of addition made for international transactions and not in respect of specified domestic transactions, which are also at par and covered by the provisions of section 92D and Chapter X of the Income-tax Act.

  12. Sub-section (9) of section 270A of the Act provides the circumstances in which the amount of under-reported income shall be considered to be misreporting of income. Circumstances provided in above sub-section will also be subject matter of litigation. The Assessing Officer is likely to allege in most of the cases that under-reported income is consequence of any misreporting and, therefore, same is subject to penalty @ 200%. In this regard, it may be stated that:

    1. Clause (a) of sub-section (9) provides that there is misrepresentation or suppression of facts. The meaning and scope of terms “misrepresentation or suppression of facts will be subject matter of litigation. The term “misrepresentation” or “suppression of facts” indicates a mala fide intention on the part of the assessee to submit wrong facts or to conceal the particulars of an income or expenditure. It would involve a guilty mind. Therefore, in order to hold whether there is misrepresentation or suppression of facts, onus will be on the Assessing Officer. Broadly, the term “suppression of facts” would mean concealment of income and “misrepresentation”, refers to furnishing of inaccurate particulars. Therefore, the issue will arise whether the assessee has concealed the particulars of income or has furnished inaccurate particulars so as to fall within the scope of “misreporting of income” and penalty will be leviable @ 200% of the tax payable on the amount of under-reported income.

    2. It is also stated in this regard that if we read the provisions of clause (a) of sub-section (9) of Section 270A of the Act with provisions of clause (a) of sub-section (6) of Section 270A of the Act, the conclusion would be that there would be no such income which will fall within the normal category of under-reported income subject to penalty @ 50% in the cases where the assessee has made a claim in the return of income which has been disallowed by the Assessing Officer. In case the assessee furnishes the explanation in respect of the claim and substantiate the same with evidence and Assessing Officer is satisfied that explanation was bona fide, such addition or disallowance has to be excluded from the scope of the under-reported income in terms of clause (a) of sub-section (6) of Section 270A of the Act. In case the Assessing Officer is not satisfied with the explanation and evidence submitted by the assessee, he will hold that there was misrepresentation or suppression of facts and, therefore, will categorise the addition under the category of misreporting of income and will levy the penalty @ 200% of the tax payable. Since there would be no such case where penalty will be levied @ 50%, and the Assessing Officer will levy the penalty @ 200%, litigation in regard to all such additions / disallowances will be there. Similar will be the situation with reference to clause (c) of sub-section (9) of section 270A. Aforesaid clause provides that under-reporting income will be deemed to be misrepresenting of income when claim of expenditure is not substantiated by any evidence. The effect of this condition will also be the same. Either the assessee will be able to satisfy the Assessing Officer that his claim was bona fide and has made disclosure of all material facts or in the alternative the Assessing Officer will categorise the transaction as misreporting of income.

    3. Other clauses of sub-section (9), such as, clauses (d), (e) and (f) will also result in litigation. It would again be a question of facts whether assessee has made false entry in the books of account or not or whether there was any failure of the assessee to record any receipt in the books of account. In order to hold that there is false entry, a guilty mind is necessary and therefore, onus will be on the department to prove that entry is false. It will be a question of argument whether entry is false or not. Further, as regards entry for receipt of an income, the assessee may be of opinion that same is of capital nature or may be that the assessee would have made the entry in subsequent year when the income was actually received whereas the Assessing Officer might have taken a view that income is assessable in an earlier year and he may hold that the assessee has failed to record the receipt chargeable to tax in that very year. In regard to clause (f) also there would be litigation since it is also a matter of controversy whether a transaction with a foreign party is in the nature of ‘international transaction’ covered u/s. 92B of the Income-tax Act or not. Similarly, there can be a controversy whether a transaction is in the nature of ‘specified domestic transaction’ or not in terms of section 92BA of the Act.

  13. On first reading of sub-sections (3) & (4) of Section 270AA of the Act which provides immunity from imposition of penalty, one gets the impression that in a case of under-reported income the Assessing Officer has a discretion to accept the application or reject the application and order for the same has to be passed within a period of one month from end of the month in which the application is received. In case of misreporting of income referred to in sub-section (9) of Section 270A of the Act, the Assessing Officer has no power to grant the immunity. On careful reading of sub-section (3) of Section 270AA, however, it is evident on the basis of the word “shall” that the Assessing Officer has no discretion to reject the application for immunity in the case of under-reported income. The aforesaid provision, however, excludes the case for levy of penalty in case of misreporting of income. Further, sub-section (4) provides that the Assessing Officer can either accept or reject the application. In case the Assessing Officer has no power to reject the application in case of under-reported income, as stated above, logical and meaningful interpretation with reference to sub-section (4) would only be that the discretion available to accept or reject the application under sub-section (4) is with reference to application for grant of immunity in the case of misreporting of income. Hence, it is stated that the section has provided for filing an application by the assessee and grant of immunity by the Assessing Officer even in the cases of misreporting of income.

  14. Lastly, it may be stated that provisions of section 270A(3) provides for determination of under-reported income with reference to income assessed and income determined on processing of return u/s. 143(1)(a) of Income-tax Act. As per provisions of clause (a) of sub-section (1) of Section 143 of the Act adjustments can be made while processing the return in the amount of income shown in the return on account of arithmetical error, incorrect claim, loss claimed as per belated return, disallowance of expenditure as per Tax Audit Report, disallowance of deduction and addition to income as per Form 26AS, Form 16A or Form 16. As per provisions any difference in income on account of adjustments made while processing return u/s 143(1)(a) of the Act will not be considered to be under-reported income and no penalty will be leviable with reference to the same. This position is quite clear from the provisions of section 270A of the Act as well as from the examples given by the Government in the Memorandum explaining the provisions of Finance Bill, 2016.

1. Section 115BBE

This article aims at highlighting the provisions of Section 115BBE of the Income-tax Act, 1961 (Act), applicable from Asst. Year 2017-18 onwards and some practical concerns surrounding its applicability.

1.1 Certain unexplained cash credit, investment, expenditure, etc., are deemed as income under Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and were earlier subject to tax as per the tax rate applicable to the taxpayer. As a consequence, in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit and even if such income was higher than basic exemption limit, it could be levied at the lower slab rate.

1.2 Amended Provisions of Section 115BBE

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. asst year 2017-18 now specifically levies tax on such unexplained items deemed as income at the aggregate of:

a) The amount of Income Tax calculated on the income referred to in sections 68, 69, 69A to 69D at the rate of 60 per cent (plus surcharge @ 25% on such tax and cess, as applicable). Thus effectively the rate comes to 77.25 per cent if such income is reflected in the return of income furnished u/s. 139. It may be noted that if such income is not reflected in the return of income furnished u/s. 139, then penalty of 10 per cent on tax payable u/s. 115BBE shall be imposed u/s. 271AAC w.e.f. asst. year 2017-18. In such a case the burden including penalty will come to 83.25%.

b) The amount of Income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in sections 68, 69, 69A to 69D

c) Moreover, no deduction in respect of any expenditure or allowance (or set off of any loss) shall be allowed to the assessee under any provision of the Income-tax Act in computing his income referred to in sections 68, 69, 69A to 69D.

1.3 Analysis for better understanding

For the sake of better understanding, let us now ponder on the applicability of Section 115BBE of the Act with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit.

Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income.

Consider a scenario where an individual files his return of income, declaring income from tuition fees and avails the tax slab benefit. However, such individual is unable to substantiate the source of such income and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction.

Under such circumstances, the Assessing Officer may now be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act. This means that such income, though already offered to tax by the taxpayer, would be taxable at flat rate of 60 per cent on gross basis (i.e., without any deduction / allowance), (plus surcharge @ 25% on such tax and cess, as applicable). Thus effectively the rate comes to 77.25 per cent if such income is reflected in the return of income furnished u/s. 139.

Whether it means that the Assessing Officer is vested with unfettered powers to reject any explanation, being not to his satisfaction? It may be noted that the Assessing Officer is required to act reasonable and just while framing any opinion surrounding the explanation offered by the taxpayer. At the same time the taxpayer is nevertheless saddled with the primary obligation to demonstrate the nature and source of any sum credited in books of account.

Some individuals file their return of income, offering income in the nature of Tution Fee, Commission, Brokerage, Embroidery, etc., and avail the benefit of exemption limit as well as benefit of tax slab. In the absence of requisite substance for proving nature and source in such transactions, one needs to consider the income-tax implications under amended Section 115BBE.

1.4 Some Issues on Section 115BBE

Section 68 basically applies to unexplained ‘cash credit’ like loans, deposits, advances, share capital, etc. The point to be considered is whether it will also apply to ‘income’ which is already offered to tax as normal income. If an Assessing Officer rejects taxpayer’s explanation surrounding the head of taxation (say, House Property v. Business Income or Income from other source, Business Income v. Capital Gains), being not to his satisfaction, whether Section 115BBE of the Act can still be triggered, empowering the Assessing Officer to inter alia deny all bona fide expenses / allowances as per Income Tax Act? In such a case, it may be argued that Section 115BBE of the Act is a machinery provision to levy tax on income and it should not enlarge the ambit of Section 68 of the Act to create a deeming fiction to tax any sum already credited / offered as income. Such recourse is unwarranted, keeping in view the objective of introducing Section 115BBE of the Act, which was only to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit.

So far tax laws are concerned, it is difficult to predict the precise stand of the department, but one can take adequate measures to safeguard himself from the possible complications or hindrances that may arise. Such safeguards may be an endeavour to demonstrate substance over form; maintain proper documentation evidencing the nature and source of income, Ensuring that transactions are routed through normal banking channel, which will lend due credence and it will help in proving nature and source of amount and to prove that the transaction is bona fide.

1.5 Practical problems concerning flat rate of tax if addition is made under sections 68, 69, 69A to 69D

a) Flat rate of tax, surcharge and education cess : While we appreciate the anxiety of the Revenue about taxing the income deemed and added in assessment under Section 68, section 69, 69A to 69D, lot of confusion has arisen on the practical implication and charging of the effective tax @ 77.25% u/s. 115BBE if income is reflected in the Return furnished u/s. 139. Such tax rate is prohibitive. And in case the income is not reflected in the Return, there is provision for penalty of 10% u/s. 271AAC on tax u/s. 115BBE. In such a case the effective tax, surcharge, education cess and penalty will work out to 83.25 per cent. Such stipulation needs review and the tax rates should be resumed to maximum marginal rate of 30% as prevailing prior to amendment made after demonetisation w.e.f. asst. year 2017-18.

b) The Board needs to make difference in case an assessee has already considered a receipt as his income and shown in the return say under the head Income from other sources. In such a case it will not be proper to resort to provisions of section 68 etc. as it will entail unnecessary litigation. We need to appreciate that in practical life it may not be possible for the taxpayers to prove the source with hard evidence in all cases. In contrast, if somebody is claiming any credit as capital receipt and has not offered it for tax, then the A.O. may apply provisions of section 68. In such cases marginal rate of tax may be applied at best.

c) We suggest that a proviso should be inserted to provide that if any assessee declares any income at his own under the head income from other source mentioning its nature, then in such cases section 68 or section 115BBE will not apply.

d) In case income of any other person is shown by other member of a family, the remedy is already available to the department. For example, in case any lady assessee shows income of vague nature and the department feels that it belongs to her husband, then the department is already empowered to make protective assessment in the hands of lady and make substantive assessment of such income in the hands of husband. If the case of the department is that income does not belong to the assessee, why they treat it as her income at all. Let them find out, whom it actually belongs to and tax it in his hands.

e) If the income shown by a lady assessee is from “other sources” and if such amount is invested by her, some enthusiastic A.O. may also trap her u/s. 69 by questioning source of investment and deeming the amount in certain cases as unexplained investment. For being just and avoid double jeopardy, it needs to be provided that where any amount is declared on his own by the assessee as Income from other sources, there need not be any addition u/s. 69 to the extent of such income utilised for the investment.

f) It is suggested to clarify that the amount shown as income by the assessee will not be subject to any addition u/s. 68 etc. and secondly on such amount which are declared as income by assessee on his own, the normal tax rate or at best maximum marginal rate of 30 per cent will apply. The exemption limit in respect of amount declared by the taxpayers at their own should continue to be allowed. Section 115BBE may be suitably amended to avoid unnecessary hardship.

Though section 115BBE applies to the amount of income referred to in sections 68, 69, 69A to 69D, we are confining discussion here only to implications of section 68 and section 69, as these sections are crucial for considering unexplained income.

2. Section 68

As per section 68, where any sum is found credited in the books of an assessee maintained and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the A.O., the sum so credited may be charged to income tax as the income of the assessee of the relevant previous year.

2.2 W.E.F. Asst. Year 2013-14, section 68 has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s. 68.

Further, a new section 115BBE has been inserted, w.e.f. Asst. Year 2013-14, and amended w.e.f. Asst. Year 2017-18 which provides that the deemed income on account of unexplained cash credit u/s 68, unexplained investment u/s. 69, unexplained money u/s. 69A, unrecorded investment u/s 69B, unexplained expenditure 
u/s. 69C and borrowing or repaying of hundi u/s. 69D shall be taxed at an effective rate of 77.25% if such income is reflected in the Return (please refer para 1 above) irrespective of the total income of the assessee. It further provides that no expenditure or allowances shall be allowed from such income.

2.3 Burden of proof is on the assessee

The Supreme Court in the cases of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) and Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) held that the law is well-settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. Where the nature and source of a receipt, whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source.

In the case of Shankar Industries v. CIT [1978] 114 ITR 689 (Cal.), the Calcutta High Court held that it is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor, the capacity of such creditor to advance the money and lastly the genuineness of the transaction. Only after the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to the department.

The Madras High Court in the case of V. Datchinamurthy v. Asstt. Director of Inspection [1984] 149 ITR 341 (Mad.) held that it has been a long accepted principle of income-tax law that an assessee is obliged to explain the nature and source of cash credits in his accounts and in the absence of satisfactory explanation on his part, the assessing authorities can very well proceed to treat the amount of cash credits in question as representing the taxpayer’s income.

The Kerala High Court in the case of ITO v. Diza Holdings (P.) Ltd. [2002] 120 Taxman 539 (Ker.) held that it is clear on the terms of section 68 that the burden is on the assessee to offer a satisfactory explanation about the nature and source of the amount found credited in the books of the assessee. It is also clear that the mere furnishing of particulars is not enough. The mere fact that payment was made by way of account payee cheque is also not conclusive. Therefore, the Assessing Officer would be entitled to consider whether notwithstanding the fact that the payments were made by cheques, whether the assessee has satisfactorily explained the nature and source of the amounts found credited in the books of the assessee.

The Rajasthan High Court in the case of CIT v. R.S. Rathore [1995] 212 ITR 390 (Raj.) held that while explaining the various credits and investments, it is possible that the assessee may be successful in explaining some of them, but that does not by itself mean that the entire investments has to be considered as explained. It is each and individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee.

The Calcutta High Court in the case of C. Kant & Co. v. CIT [1980] 126 ITR 63 (Cal.) held that in the case of cash credit entry it is necessary for the assessee to prove not only the identity of the creditors but also to prove the capacity of the creditors to advance the money and the genuineness of the transactions. On whom the onus of proof lies in a particular case is a question of law. But whether the onus has been discharged in a particular case is a question of fact.

On the other hand, it was held in the case of CIT v. Metachem Industries [2000] 245 ITR 160 (MP) that where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. If that person owns the entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited the amount.

(Regarding burden of proof in case of share application money credited in the books of the company, see para 24.3).

2.4 Whether the burden to prove genuineness of transactions as well as creditworthiness of creditor between assessee and creditor and/or creditor and sub-creditor is upon the assessee

In Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau.) the assessee who carried on the business of supply of bamboo had taken loans amounting to ₹ 4,35,000 and ₹ 5 lakhs during the previous year relevant to the assessment year 1992-93. The amounts were paid by cheques by the creditors to the assessee. The creditors received the said amount by way of loans from their sub-creditors by means of cheques. The A.O. declined to treat the loan amount of ₹ 4,35,000 as genuine. As regards ₹ 5 lakhs he declined to treat the loan amount to the extent of ₹ 4,25,000 as genuine. The A.O. added the two amounts to the total income of assessee as income from undisclosed sources. The Tribunal set aside the order passed by the Commissioner (Appeals) and upheld the order of the A.O. on the ground that neither the sub-creditors nor the creditors in question had creditworthiness to advance the said loans.

On appeal the Gauhati High Court held –

(i) That the assessee had established the identity of the creditors. The assessee had also shown, in accordance with the burden, which rested on him u/s. 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors which was not in dispute. Once the assessee had established these, the assessee must be taken to have proved that the creditor had the credit worthiness to advance the loans. Thereafter, the burden had shifted to the A.O. to prove the contrary.

(ii) The failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, could not, under the law be treated as the income from undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. The A.O. failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub- creditors from the assessee. Therefore, the A.O. could not have treated the said amounts as income derived by the assessee from undisclosed sources.

(iii) That no assessment could be made contrary to the provisions of law. In the instant case, the very basis for making the assessment was under challenge. If the assessment was based on a completely erroneous view of law, such findings could not be regarded as mere findings of fact, but must be treated as substantial questions of law. Therefore, the question raised in the appeal was a substantial question of law because it went to the very root of the assessment made.

(iv) That a person may have funds from any source and an assessee, on such information received, may take a loan from such a person. It is not the business of the assessee to find out whether the source or sources from which the creditor had agreed to advance the amounts were genuine or not. If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep it in the bank, the said amount cannot be treated as income of the assessee from undisclosed sources.

The above decision is likely to have far reaching effect with regard to provisions of section 68. It is praiseworthy that the Gauhati High Court has added a new dimension by reading section 68 together with section 106 of the Indian Evidence Act. Now, in view of the above decision, a creditor’s creditworthiness has to be judged vis-a-vis transactions, which have taken place between the assessee and the creditor and it is not business of assessee to find out source of money of his creditor or genuineness of his transactions, which took place between creditor and sub-creditor and/or creditworthiness of sub-creditors for these aspects may not be within special knowledge of the assessee. In Nemichand Kothari’s case the Court has followed the decision of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam).

2.5 Whether the assessee can seek the aid of section 131 to prove the genuineness of transactions:

In CIT v. Kamdhenu Vyapar Co. Ltd. [2003] 263 ITR 692 (Cal.), it has been observed that simple disclosure of certain materials will not help the assessee to discharge the burden of proving the credits u/s. 68 of the Income-tax Act, 1961. Until the onus is prima facie discharged by the assessee, it never shifts on the Department. But in order to ascertain whether prima facie onus has or has not been discharged, the A.O. has a duty to enquire into the materials so disclosed. The assessee may seek assistance of section 131 of the Act for the purpose of proving its own case. Section 131 empowers the A.O. to exercise the same power as vested in a Civil Court for compelling attendance of witnesses. An opportunity in-built in section 68 of the Act has been given to the assessee to prove to the satisfaction of the A.O. that the apparent is real and the transaction was genuine. In the process of availing of such opportunity, the assessee may seek aid of section 131 of the Act. If in the process, in order to secure attendance of a person a request is made by the assessee to the A.O. for issuing of summons, it is incumbent on the A.O. to issue such summons in order to enable the assessee to avail of the opportunity provided by the statute, otherwise the A.O. would be denying the opportunity provided to the assessee, in-built in section 68.

2.6 Whether A.O. can make an addition merely on the ground of non-appearance of the creditor / donor

In Atmaram J. Manghimalani (HUF) v. ITO 67 ITD 289 (Mum.) : 62 TTJ (Mum.) 357 it had been held that mere non-appearance of the donor, in the absence of any evidence that donated amount represents undisclosed income of the appellant, no addition can be made. Same analogy may apply in case of loan.

2.7 Whether the power of the A.O. u/s 68 is absolute one

In a recent decision of Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (Cal.) it was held that the power of the A.O. u/s. 68 is not an absolute one. It is subject to his satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to the explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the A.O. to consider the same and form an opinion whether the explanation is satisfactory or not.

Duty of A.O. if the conclusion is adverse : If the conclusion is adverse wholly or in part to the interest of the assessee, it is incumbent on the A.O. to intimate or inform the conclusion arrived at to the assessee. When such information or intimation is received by the assessee, the onus shifts on the assessee. He may furnish further explanation or information to support its contention. If further information or materials are furnished, the A.O. is bound to examine the same and form his final opinion and pass an appropriate order. Such opinion is also subject to examination by the Commissioner (Appeals) or the Tribunal and if it involves a question of law, it is also subject to scrutiny by the High Court.

2.8 Whether an addition can be made on account of cash credit u/s. 68 even if no books of account are maintained

In the case of Anand Ram Raitani v. CIT [1997] 223 ITR 544 (Gau.) it was held that the Assessing Officer before invoking the power u/s 68 of the Act must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account and if the assessee fails to satisfy the Assessing Officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking the power, discharging the burden is a subsequent condition.

2.9 If books of account have been rejected and tax is levied on estimated income, whether A.O. can make an addition for cash credit u/s. 68

There is nothing in law which prevents the Assessing Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account of the assessee as unreliable. This was so decided in Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC). Whether in a given case the Assessing Officer may tax the cash credit entered in the books of account of the business, and at the same time estimate the profit must, however, depend upon the facts of each case – CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194, 196 (SC).

Where a particular business income of the assessee has been estimated and determined, and in such a case certain cash credits are found, the Assessing Officer may be precluded from adding the said unexplained cash credit as undisclosed income from the business, the income of which was determined on estimate basis. But where the unexplained cash credits are not referable to the business income of the assessee which was estimated, the Assessing Officer is not precluded from treating the unexplained cash credit as income from any other source – CIT v. Maduri Rajaiahgari Kistaiah [1979] 120 ITR 294 (AP).

In CIT v. Neemar Ram Badlu Ram [1980] 122 ITR 68 (All.), the books of account of the assessee-firm for the years 1960-61 to 1963-64 were found to be irregular. The balance-sheets revealed excess of assets over actual liabilities. It was discovered that there were a large number of mistakes in the totals of the cash book and at many places the assessee had deliberately inflated the total on the credit side and deflated the total on the debit side of the cash book to suit his convenience. Taking each year separately, the Assessing Officer made addition for peak credit/unaccounted money and also for extra profits. The Tribunal drew the inference that there was a connection between the unaccounted money and excess assets discovered in the business from year to year. There was also a connection between the unaccounted money and the extra profits withheld from the account books from year to year. The Tribunal, therefore, held that only the difference of the peak unaccounted money from year to year after giving adjustment for earlier years’ additions could be brought to tax. It was further held that there should not be any further addition on account of extra profits where the amount of such extra profits did not exceed the amount of the difference in peak credit/unaccounted money added for that year. Where, however, the extra profits estimate is more than the addition on account of the difference in peak credits, the bigger of the two alone will be added. The Tribunal’s view was upheld by the High Court.

In CIT v. Tyaryamal Balchand [1987] 165 ITR 453 (Raj.), additions were made in the trading results. Further, amount representing cash credits were also added as income from undisclosed sources. The Tribunal found that the additions in trading results would cover the amount of cash credits as also substantial additions had been made in earlier years. It was held that the Tribunal was justified in deleting the addition on account of cash credits.

Similarly, in CIT v. K.S.M. Guruswamy Nadar & Sons [1984] 149 ITR 127 (Mad.), it was held that two additions, one towards suppressed book profits and the other towards bogus cash credit, should be telescoped and covered into one addition.

In Ramcharitar Ram Harihar Prasad v. CIT [1953] 23 ITR 301 (Pat.) it was held that adding up extra estimated profits as well as the amounts of cash credits was open to authorities only when there was material to show that assessee carried on an independent business apart from the business for which assessment was being made.

In Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 (AP) it was held that where the authorities reject the books of account and estimate the gross profits at a flat rate, they cannot rely on the books for the purpose of adding cash credit which were part of the scheme of balancing accounts, to the profits so ascertained.

Similar view has been expressed in Reliable Surface Coatings v. ACIT [2011] 7 ITR (Trib.) 183 (Ahd).

In CIT v. Babban Pandey [1970] 77 ITR 601 (All.) the High Court followed Maddi Sudarsanam case [observing that the decision of the Supreme Court in Kale Khan’s case, [1963] 50 ITR 14 (SC), is not an authority for the contention that where the income of an assessee has been estimated on a percentage basis, the unexplained cash credit appearing in the business books must be separately added.

In CIT v. Daluram Pannalal Modi [1981] 129 ITR 398 (MP) it was held that unless the assessee shows by adducing satisfactory evidence that the cash credits were referable to the undisclosed income of the known or disclosed source, namely, the business, income from which had already been estimated, the Tribunal cannot assume that once the business income was estimated, the unexplained cash credit is covered by the income so estimated.

Other relevant cases are :

1. Srinivas Ramkumar v. CIT [1948] 16 ITR 254 (Pat.);

2. D. C. Auddy & Bros. v. CIT [1955] 28 ITR 713 (Cal.);

3. G. M. Chenna Basappa v. CIT [1958] 34 ITR 576 (AP);

4. Ratanchand Dipchand v. CIT [1960] 38 ITR 188 (MP);

5. S. Kumaraswami Reddiar v. CIT [1960]40 ITR 590 (Ker.);

6. Guduthur Bros v.CIT [1966] Taxation 22 (3)-241 (Mys.).

7. Mangalchand Gobardhan Das v. CIT, [1954] 26 ITR 706 (Assam)

8. L. R. Brothers v. CIT [1957] 31 ITR 815 (All.).

2.10 Relevance of entries in the books of account with reference to the Indian Evidence Act, 1872

It has been observed in CBI v. V. C. Shukla [1998] 3 SCC 410 (SC) that according to section 34 of the Indian Evidence Act, 1872, entries in books of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the Court has to inquire. From a plain reading of section 34 it is manifest that to make an entry relevant thereunder it must be shown that it has been made in a book, that book is a book of account and that book of account has been regularly kept in the course of business. From the said section 34 it is also manifest that even if the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still, the statement made therein shall not alone be sufficient evidence to charge any person with liability. It is thus seen that while the first part of that section speaks of the relevancy of the entry as evidence, the second part speaks, in a negative way, of its evidentiary value for charging a person with a liability…..

Where the genuineness and regularity of the accounts have not been challenged, the accounts are relevant prima facie proof of the entries and the correctness thereof under section 34 of the Evidence Act – Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam); Dhansiram Agarwalla v. CIT [1996] 217 ITR 4 (Gau.).

2.11 In case share application money is credited in the books of company

W.E.F. Asst. Year 2013-14, section 68 has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s. 68. However the amendment shall not apply where the share capital, share premium or share application money is received from Venture Capital Fund or Venture Capital Company registered with SEBI.

The position prior to the amendment is enumerated below:

Some Courts had taken a view that amounts received towards share capital are totally outside the scope of assessment, even if they are unproved, on the ground, that they cannot be treated as cash credits falling within the purview of section 68.

The Delhi High Court after a review of the precedents on the subject in CIT v. Divine Leasing and Finance Ltd. and CIT v. Lovely Exports P. Ltd. [2008] 299 ITR 268 (Del.) in a group of cases held that section 68 would require both the identity of the depositor and his creditworthiness to be proved. Where a company furnishes the address and permanent account number (PAN), such identity is established. As regards creditworthiness in a matter of subscription to public issue, more may not be expected from the assessee. The burden of proof that is expected as regards creditworthiness has to be decided in the light of the facts of each case. Where the subscriptions were received through banking channels as prescribed under SEBI regulations, the inference that the subscribers lack creditworthiness could not have been lightly drawn without some investigation on the part of the Assessing Officer. The addition without such investigation should be treated as based upon mere surmises. The principle that identity is more important in such cases has been reiterated and that even where creditworthiness is not established to the satisfaction of the Assessing Officer, it need not be unexplained income of the company, since the legitimate inference is that the income is that of the subscriber as long as the advance of the amount to the company is established and there is nothing to suggest that the amount belonged to the company.

The SLP of the department in the case of Lovely Exports (supra) has been dismissed by Supreme Court 319 ITR (St) 5 observing: “Can the amount of share money be regarded as undisclosed income under section 68 of the Income-tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”

Similar view had been adopted in CIT v. Electro Polychem Ltd. [2007] 294 ITR 661 (Mad.) purportedly following the decisions in CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC). The view upheld by the Supreme Court in Steller Investments’ case (supra) was rendered in the context of a Departmental appeal against the rejection of reference on the decision of the Tribunal, reversing the decision of the Commissioner (Appeals) setting aside the assessment for detailed investigation regarding the genuineness of the subscriptions towards share capital. It was the said order of setting aside, which was reversed in the circumstances, where lack of genuineness was not established by the Assessing Officer. The reason, why the Supreme Court upheld the High Court order was that the Tribunal’s decision was based on facts.

Allahabad High Court in the case of Jaya Securities Ltd. v. CIT [2008] 166 Taxman 7 (All.) held that no addition u/s. 68 can be made in respect of investment made by different persons in the share capital of a company, limited by shares, whether public or private. The Full Bench of the Delhi High Court in CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 (Del.)(FB) overruled its earlier decision in the case of Steller Investment Ltd.’s case [1991] 192 ITR 287 (Del.).

In yet another case in CIT v. Bhagwati Jewels Ltd. [1993] 201 ITR 461 (Del.) the High Court even without the benefit of the Full Bench decision in Sophia Finance Ltd.’s case (supra) distinguished the High Court decision in Steller Investment’s case.

The Calcutta High Court in CIT v. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal.) held that the Supreme Court decision in Steller Investment Ltd.’s case (supra) had not bound the Income Tax Department to accept share capital amounts as falling outside section 68.

However in Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (Cal.) it was held that the amounts received as share capital by way of cheques on nationalised banks after advertisement in newspapers inviting share capital, cannot be subject to addition. Also refer CIT v. Victor Electrodes Ltd. [2010] 329 ITR 271 (Del.).

In fact, the issue came up before the Supreme Court in CIT v. Gujarat Heavy Chemicals Ltd. [2002] 256 ITR 795 (SC) in respect of credits by way of share capital in the names of certain Sikkim Companies, which were not genuine with the source of funds attributed to one Sanjay Dalmia, so that it was for this reason, that it was not assessable in the hands of the company as decided by the Tribunal and sustained ultimately by the Supreme Court.

In Down Town Hospital Pvt. Ltd.[2004] 267 ITR 439 (Gau.), the High Court reviewed the case law on the subject and concluded, where the identity of the shareholders is established, the further requirement as to the source may not be expected, since the burden shifts to the Revenue once the identity is established.

The above view has been followed in CIT v. STL Extrusion P. Ltd. [2011] 333 ITR 269 (MP); CIT v. Ambuja Ginning, Pressing & Oil Co. P. Ltd. [2011] 332 ITR 434 (Guj.), CIT v. K..C. Fibres Ltd. [2011] 332 ITR 481 (Del.), CIT v. Dwarkadhish Investment P. Ltd. [2011] 330 ITR 298 (Del.), CIT v. Winstral Petrochemicals P. Ltd. [2011] 330 ITR 603 (Del.); CIT v. Misra Preservers Pvt. Ltd. [2013] 350 ITR 222 (All.). The Delhi High Court in the case of CIT v. Value Capital Services P. Ltd [2008] 307 ITR 334 (Del.) held that department must show that investment made by subscribers actually emanated from coffers of assessee to be treated as undisclosed income of assessee.

A review of the case laws would appear to indicate that the degree of responsibility in respect of share capital on the company may well be less, but it cannot disown the responsibility especially if it is a private company, where the shareholders may ordinarily be expected to be known to the company.

The same issue came up before the Madras High Court before a different Bench in CIT v. Gobi Textiles Ltd. [2007] 294 ITR 663 (Mad.) where the assessee had on the request of the Assessing Officer produced evidence regarding share capital contributions of more than Rs.1 lakh each. Salary certificates were produced to show their identity as well as capacity to subscribe for the shares. The identity of the shareholders was not in doubt. The Assessing Officer accepted the genuineness of one of the shareholders and added the share capital of nine others. The Commissioner (Appeals) not only confirmed the addition but also sustained the penalty. The Tribunal deleted the addition since the assessee had discharged the onus by the identification and proof as to source, so that the addition could only be taken as made on mere surmise. The finding of the Tribunal being one of fact, the High Court declined to interfere. It incidentally endorsed the reasoning of the Delhi High Court in Sophia Finance Ltd.’s case [1994] 205 ITR 98 (Del.) for its conclusion, that the addition was not justified, since no enquiry was conducted by the Assessing Officer to discredit the claim of genuineness.

The Chhattisgarh High Court in the case of ACIT v. Venkateshwar Ispat P. Ltd. [2009] 319 ITR 393 (Chhattisgarh) held that merely because notice issued to some shareholders was not responded, their share application money cannot be treated as unexplained amount u/s. 68.

Where the assessee files the return of income of the share applicants and their loan confirmations, the burden of the assessee stands discharged – CIT v. Jay Dee Securities and Finance Ltd. [2013] 350 ITR 220 (All.).

The Delhi High Court in the case of CIT v. Orbital Communication (P) Ltd. [2010] 327 ITR 560 (Del.) held that where assessee has established the genuineness of the share transaction and the creditworthiness of the applicant, then mere failure to produce the creditor cannot be a ground for making addition u/s. 68. Also refer CIT v. Samir Bio Tech P. Ltd. [2010] 325 ITR 294 (Del.).

However where information was obtained from investigation wing about accommodation entry providers and their modus operandi, and the list contained the name of the assessee to whom entry providers had provided entries, and further summons to such persons were not responded to, in such a case the affidavits filed by assessee after 2 years from entry providers to the effect that transactions were genuine, are of no evidentiary value. There is no duty on assessing officer to prove that monies emanated from coffers of assessee – CIT v. Nova Promoters and Finlease (P) Ltd. 342 ITR 169 (Del.).

2.12 When can the income be treated as cash credits u/s. 68

As per section 68, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of the previous year if the explanation offered by the assessee about the nature and source thereof, is, in the opinion of the Assessing Officer, not satisfactory.

In Davinder Singh v. ACIT [2006] 101 TTJ 505 (ITAT- Asr.) it has been held that the expression “any sum” is very wide and general in nature. It covers all credit including loan, receipts and any other amount of similar nature. The credit shall also include both loans and trade credits and also other receipts, be that of cash or kind. These may be in the name of the assessee i.e., capital a/c or in the name of a 3rd party.

The Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801: 80 Taxman 89 (SC) held that in case there is prima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonable.

In the case of Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.) 13, some of the creditors were produced before the A.O. while affidavits of some of them have been produced. Balance Sheets of some of the creditors were also produced wherein the transactions were entered into. Some of the creditors have filed confirmations. Cash creditors being income-tax assessees who also had bank accounts, the finding of the A.O. that the creditors were not creditworthy was not justified. The examination by the A.O. of some of the creditors had not revealed any finding adverse to the claim of the assessee. Thus, when the cash credits stand explained, no addition, including addition on account of interest thereon, was justified. Presuming that cash credits are unexplained, the CIT(A) was fully justified in allowing set off of intangible additions against addition on account of unexplained cash credits – Asstt. CIT v. India Tyre House [2001] 72 TTJ (Gau.) 316, CIT v. Heeralal Chaganlal Tank [2002] 257 ITR 281 (Raj.) : [2002] 176 CTR (Raj.) 495; Shivam Synthetics (P) Ltd. v. Asstt. CIT [2002] 76 TTJ (Jd.) 164; Rohini Builders v. Dy. CIT [2002] 76 TTJ (Ahd.) 521; R. Dalmia through L.R. v. CIT [2002] 172 CTR (Del.) 180 and B & Brothers Engg. Works v. Dy. CIT [2003] 78 TTJ (Ahd.)(TM) 876 relied on.

The Kerala High Court in the case of Oceanic Products Exporting Co. v. CIT [2000] 241 ITR 497 (Ker.) held that after the enactment of section 68, the burden is placed on the assessee to prove a credit appearing in its books of account. That burden has to be discharged with positive material. When it is contended that a person has advanced money or had given a loan, it has to be established that the person was not a man of straw and had the capacity to give the money. A conclusion regarding credit- worthiness or otherwise is essentially one of fact. It does not give rise to a question of law unless it is established that the conclusion was contrary to the materials on record. Section 68 gives statutory recognition to the principle that cash credits which are not satisfactorily explained may be assessed as income. (In this case, cash credits appeared in the names of illiterate and nomadic fishermen who were not capable of lending huge amounts and who were not shown to have owned any assets worth the name, and who also gave different versions during their examination from what they had given earlier in written statements. The High Court sustained the additions made).

The Supreme Court in the cases of A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC); CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC) held that where the assessee has failed to prove satisfactorily the source and nature of a credit entry in his books, and it is held that the relevant amount is the income of the assessee, it is not necessary for the department to locate its exact source.

The Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 121 CTR (Cal.) 20 held that it is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Where the enquiry of the ITO revealed that either the creditor was not traceable or there was no such file, the first ingredient as to the identity of the creditor could not be said to have been established. If the identity of the creditors has not been established, the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors does not and could not arise.

Allahabad High Court in the case of CIT v. Jaiswal Grain Stores [2005] 272 ITR 136 (All.) has held that in case of a new business, the addition u/s. 68 on the very first day of the commencement of the business should not be made. On the first day of the business it could not be assumed that the assessee firm though assessed as AOP, had unexplained income.

2.13 If a lender, issues confirmation for loan given and also gives affidavit, resiles or retracts later on the plea that it was a hawala transaction

Under similar facts and circumstances Jaipur Bench of ITAT in the case of Sohan Lal Jain v. ITO [1987] 59 CTR (Trib.)(Sp) 17 held that merely because a creditor turns hostile, the contention of the assessee setting up a cash credit should not be disbelieved otherwise creditors could bring their assessee to ransom. It further observed that the A.O. should have gone deeper into the matter and should have called the creditors by issuing a notice u/s. 131 to find out the truth and the assessee can certainly produce other collateral evidence to show the circumstances under which the creditor has resiled. The 
ITAT set aside the above case for fresh examination.

2.14 Whether loan received in the earlier year can be added u/s. 68 as unexplained cash credit

As per section 68 only amount found credited during the year can be added as such loan received in the earlier year cannot be added – ITO v. Nasir Khan J. Mahadik [2012] 134 ITD 166 (Mum).

2.15 Where a diary containing receipts not recorded in the books of account for a period of 2 months is found, can A.O. presume similar undisclosed receipts for the balance part of the year?

In the absence of any other diary or note book for the remaining period, multiplying formula or estimate cannot be applied for the period, for which no omitted receipts were evidenced by slips or notebook or diary

– Dr. R.M.L. Mehrotra 68 ITD 288 (Ahm.).

2.16 Whether credits in rough cash book can be added u/s. 68

Where cash credits are recorded in the rough cash book of the assessee and there is no proper explanation, sec. 68 will apply and the credit amount will be assessable as income of the assessee – Haji Nazir Hussain v. ITO [2004] 271 ITR (AT) 14 (Del). However loose sheets of paper are not books. Central Bureau of Investigation v. V.C. Shukla [1998] 3 SCC 410.

2.17 Where the Investigation Wing of the Income-tax Department found that the subscribers of the shares had availed of accommodation entries from professional name-lenders

There is no evidentiary value of the affidavits filed after two years specifically in view of the fact that subscribers did not appear or respond to the summons and issued statement before investigation wing that share application was accommodation entries – CIT v. Nova promoters and Finlease (P.) Ltd. [2012] 342 ITR 169 (Delhi).

2.18 Bank pass book cannot be regarded as a Books of Account

The Bombay High Court held that a pass book supplied by the bank to the assessee cannot be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions – CIT v. Bhaichand H. Gandhi [1983] 141 ITR 67 ( Bom.).

In Smt. Shanta Devi v. CIT [1998] 171 ITR 532 (P&H), it was held that a perusal of section 68 would show that the expression “books” has been used with reference to the word “assessee”. In other words, such books have to be books of the assessee himself, and not of any other assessee. Thus, the books of account of partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to 
tax as income u/s. 68 in the hands of the partners.

2.19 Treatment of Cash Credits in the case of Firms : There has been difference of judicial opinion on the issue of Treatment of Cash Credits in the case of Firms.

The following cases are relevant –

In CIT & Another v. Md. Perwez Ahmad & others [2004] 268 ITR 381(Pat.) – Where the Tribunal after having considered the material on record, had found that section 68 of the I.T. Act, 1961 was not attracted in the case for the reason that in this case credit in the books of account of the assessee firm, was on account of introduction of capital by the partners and the firm had failed to prove the amount credited in the books of account and as such it would be assessed in the hands of the partners as unexplained investments. The High Court held that this was a finding of fact and no substantial question of law arose from the order of the Tribunal.

In CIT v. Burma Electro Corporation [2001] 252 ITR 344 (P&H): [2002] 172 CTR (P&H) 541: [2003] 126 Taxman 533 (P&H), the assessee was a firm comprising 12 partners. The cash credit to the extent of ₹ 10,000 of Shri Hari Singh, ₹ 5,000 of Shri Gurdev Singh and ₹ 5,000 of Smt.Dhan Raj have not been properly explained by the assessee as sufficiency of funds at the time of assessment in their case to the extent have not been explained. In these circumstances, the Tribunal held that this amount of cash credits of the partners cannot be assessed as the income of the assessee-firm u/s. 68 of the Income-tax Act but it may be assessed in their individual hands as their unexplained investments, if that is permissible u/s. 69 of the Income-tax Act. Thus, according to the Tribunal the result was that the above calculated unexplained cash credit relating to partners cannot be added in the income of the firm as its unexplained income. The High Court held “In our opinion, the reasons assigned by the Tribunal for deleting the additions are directly referable to the provisions of section 68 of the Act and we do not find any cogent reason to interfere with the same merely because on a reappraisal of the entire matter, it may be possible to form a different opinion.” Similar view has been expressed in Abhyudaya Pharmaceuticals v. CIT [2013] 350 ITR 358 (All.) and Patel Vishnubhai Kantilal and Co. v. ITO [2013] 21 ITR (Trib) 204 (Ahd.).

In CIT v. Metachem Industries [2000] 245 ITR 160 (MP), it has been held that where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged. Once it is established that the amount has been invested, by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask the person who makes investment, whether the money invested is properly taxed or not. If that person owns the entry, then the burden of the assessee firm is discharged. It is open to the A.O. to undertake further investigation with regard to that individual who has deposited the amount.

India Rice Mills v. CIT 218 ITR 508, 511(All.) – Where the capital contributions are made by the partners prior to the commencement of the business by the assessee-firm, it is for the partners to explain the source of such capital contributions and if they fail to discharge such onus then such capital contributions, although entered in the books of the assessee firm, cannot be regarded as income of the assessee-firm.

Surinder Mohan Seth v. CIT 221 ITR 239 at page 240 (All.) – In this case the decision in India Rice Mill (supra) was followed.

CIT, Allahabad v. Jaiswal Motor Finance 141 ITR 706 (All.) – the Court held – “It appears to be well-settled that if there are cash credit entries in the books of the firm in which the accounts of the individual partners exist and, it is found as a fact that cash was received by the firm from its partners then in the absence of any material to indicate that they were profits of the firm, it could not be assessed in the hands of the firm. We are, therefore, of the opinion that the Tribunal did not commit any error of law and rightly held that the deposits shown in its accounts were satisfactorily explained.”

CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.) – In the case of cash credits in the accounts of a firm, the following points need be noted :

(a) there is no distinction between the cash credit existing in the books of the firm, whether it is of a partner or of a third party;

(b) the burden to prove the identity, capacity and genuineness has to be on the assessee;

(c) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources;

(d) the firm has to establish that the amount was actually given by the lender;

(e) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities;

(f) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by section 68 can be invoked;

(g) simply because the amount is credited in the books of the firm in the partner’s capital account, it cannot be said that it is not the undisclosed income of the firm and that in all cases it has to be assessed as an undisclosed income of the partner alone.

It was held by Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam) that the mere fact that the third party making deposit in a firm happens to be the wife of the assessee-partner does not ipso facto make the assessee come into the knowledge of the sources from which the money was realised. The mere fact that the partner is unable to satisfy the authorities as to the source from which his wife derived the money which she has deposited in the firm cannot be used against the partner. (also see para 25.6).

2.20 Whether ownership of the person in respect of cash credits is necessary:

The Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) held that it is a common feature of commercial and other transactions that securities are offered by other persons to guarantee the payment of the amount which may be found due from the principal debtor. The concept of security and ownership are different and it would be a wholly erroneous approach to hold that a thing offered in security by a third person to guarantee the payment of debt due from the principal debtor belongs not to the surety but to the principal debtor. The onus to prove that the apparent is not the real is on the person who claims it to be so.

In the same decision it was further held that a person can still be held to be the owner of a sum of money even though the explanation furnished by him regarding the source of that money is found to be not correct. From the simple fact that the explanation regarding the source of money furnished by A, in whose name the money is lying in deposit, has been found to be false, it would be a remote & far-fetched conclusion to hold that the money belongs to B.

2.21 Where charitable trust or institution receives a donation and fails to explain the source thereof, can the same be added u/s. 68

Donations other than corpus donations are always treated as income of the trust subject to its application towards the object of the trust. Since the donation receipts are income of the trust, question of its inclusion in the income of the trust does not arise – DIT (E) v. Keshav Social and Charitable Foundation [2005] 278 ITR 152 (Del)..

W.E.F. Asst. Year 2007-08 anonymous donations received by charitable trusts and institutions other than religious or partly religious trust or institution is taxable @30% u/s. 115BBC (subject to the limit of 5% or ₹ 1 lakh, whichever is more).

2.22 Can an educational Institution claim exemption u/s. 10 in respect of the income added u/s. 68

In case of an educational institution exempt u/s. 10(22) [now 10(23C)], the Assessing Officer noticed some credits, which he sought to treat as deemed income u/s. 68 of the Income- tax Act, 1961 and brought to tax, but denied exemption for such amount. It was argued on behalf of the assessee that the income which is exempt has to be understood in a wide sense. The High Court in Director of Income Tax (Exemption) v. Raunaq Education Foundation [2007] 294 ITR 76 (Del.) found that the income cannot be given a restricted meaning following the decision of the Supreme Court in different context in P.R. Prabhakar v. CIT [2006] 284 ITR 548 (SC). It also referred to a decision of the Supreme Court in Adityapur Industrial Area Development Authority v. Union of India [2006] 5 Scale 321 (SC), where it was held that an exemption granted cannot be taken away, unless it is expressly provided for. In such cases where the Assessing Officer infers income for a charitable institution other than what is admitted in the books, whether by anonymous donations or by way of loan, the source of which cannot be proved, such income will also be exempt subject only to the 
conditions for application of such income as well, so that there could be no liability on such income.

The above view has also been taken in the case of ACIT v. Muslim Educational Society [2010] 1 ITR (Trib.) 527 (Coch.).

However the law as regards anonymous donations has been amended by insertion of section 115BBC, whereby anonymous donations are taxed in certain cases. Even so income with reference to sction 68 would not be so covered by the amendment.

2.23 Whether section 68 can be applied against bank for deposit received

The Amritsar Bench in the case of ACIT v. Citizen Urban Co-operative Bank Ltd. [2009] 314 ITR (AT) 91 held that public deposits accepted by bank are not covered u/s. 68 as the bank is not obliged to question the source of deposit of customers where depositors have been properly introduced.

2.24 Whether section 68 can be applied to the bank with respect to deposits in the accounts of account holders

Similar point came before Punjab & Haryana High Court in the case of CIT v. Citizen Urban Co-op. Bank Ltd. [2011] 336 ITR 62 (P&H) wherein A.O. found that some deposits were made by some account-holders and the accounts were closed immediately withdrawing the deposits in cash, applying section 68. A.O. asked to explain the said deposits to assessee. It was held that since there is no nexus between depositor and the bank, section 68 cannot be applied.

2.25 Where the assessee receives advance against tenancy

The Madhya Pradesh High Court in the case of CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP) held that the landlord is only to prove the identity of the tenant and the genuineness of transaction under which deposit was made. There is no necessity to prove capacity of tenant to make deposit. Section 68 does not apply in such a case.

2.26 Cash credits in case of intangible additions

It was held by the Supreme Court in the case of Anantharam Veerasinghaiah & Co. v. CIT [1980] 123 ITR 457 (SC) held that when an ‘intangible’ addition is made to the book profits during an assessment proceedings, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as ‘intangible’, is as much a part of the assessee’s real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be. There can be no escape from the proposition that the secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books. But it is quite another thing to say that any part of that fund must necessarily be regarded as the source of unexplained expenditure or of cash credits recorded during a subsequent assessment year. The mere availability of such a fund cannot in all cases imply that the assessee has not earned further secret profits during the relevant assessment year. It is a matter for consideration by the taxing authority in each case whether the unexplained cash deficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or they are reasonably explained by reference to concealed income earned in that very year. In each case, the true nature of the cash deficit must be ascertained from an overall consideration of the particular facts and circumstances of the case. Evidence may exist to show that reliance cannot be placed completely on the availability of a previously earned undisclosed income. A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible addition but must be regarded as pointing to the receipt of undisclosed income earned during the assessment year under consideration. It is open to the revenue to rely on all the circumstances pointing to that conclusion. What these several circumstances can be, is difficult to enumerate and indeed from the nature of the enquiry it is almost impossible to do so. In the end they must be such as can lead to the firm conclusion that the assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars.

The Delhi High Court in the case of R. Dalmia v. CIT [2001] 119 Taxman 547 (Delhi) held that it cannot be an abstract proposition in law that intangible additions of previous year are to be taken note of while considering cash credit. On the facts of each case a specific plea and proof that there was any link between the intangible additions in the previous year and the cash credit has to be established, if that be a fact while tendering explanation regarding cash credit, must plainly state as a fact that the cash credit concerned did come out of the earlier intangible additions. Unless this is done, there is no requirement to make an enquiry regarding reasonableness of the explanation. It is not open to the assessee to offer two different explanations by way of alternative pleas. It is within the domain of taxing authorities to consider whether a particular cash credit, or unexplained expenditure or investment can reasonably be attributed to intangible additions, if material are placed in that regard.

The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.) held that the funds comprising the intangible additions made in earlier year would not help an assessee to presume that the said fund was always available to cover the unexplained income of the succeeding years. It is for the assessee to establish that he has not earned any secret profits during the relevant year and that the investment flowed from the intangible additions made in the preceding years.

Also refer the decision Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.)

2.27 Whether A.O. can make addition u/s. 68 without making proper enquiry

Section 68 of the Income-tax Act 1961, empowers the Assessing Officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation, A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained – Khandelwal Constructions v. CIT 227 ITR 900 (Gau.).

The assessee may seek assistance of section 131 of the Act for the purpose of proving its own case. Section 131 empowers the A.O. to exercise the same power as vested in a civil court for compelling attendance of witnesses. Further the assessee has the right to cross-examine.

2.28 Right to cross-examine

The assessee is also entitled to cross examine any person whose statement has been recorded by the A.O. and such statement is proposed to be used by the A.O. – CIT v. Eastern Commercial Enterprises 210 ITR 103 (Cal.).

The assessee had for its part produced the discharged hundis and also vouchers showing payment of interest. That is sufficient for the assessee to discharge its initial burden. It was for the ITO to have examined the bankers when he wanted to rely on the statements obtained from them. The A.O. ought to have given an opportunity to the assessee to cross-examine them before taking into account the contents of those statements – CIT v. Gani Silk Palace [1988] 171 ITR 373 (Mad.).

3. Section 69

3.1 Provisions of Section 69

As per section 69, where the assessee has made investments which are not recorded in the books of account maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not satisfactory in the opinion of the A.O., the value of the investments may be deemed to be the income of the assessee of the corresponding financial year.

W.E.F. Asst. Year 2013-14, the Finance Act, 2012 has inserted a new section 115BBE which provides that the deemed income on account of unexplained cash credit u/s. 68, unexplained investment u/s. 69, unexplained money u/s. 69A, unrecorded investment u/s. 69B, unexplained expenditure u/s. 69C and borrowing or repaying of hundi u/s. 69D shall be taxed at a flat rate of 30% irrespective of the total income of the assessee.

3.2 Explanation of the assessee is necessary

Section 69 provides that A.O. may treat the value of the investments as the income of the assessee in case the explanation offered by the assessee is not found satisfactory to him.

The Supreme Court in this regard held in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC) : 103 Taxman 382 that even if assessee’s explanation regarding source of an investment is not found to be satisfactory, AO has discretion to treat or not to treat such investment as assessee’s income.

Similarly, the Andhra Pradesh High Court in the case of CIT v. Moghul Durbar [1995] 216 ITR 301 (AP) held that even if the explanation of the assessee is rejected, section 69 confers only a discretion to the AO to deal with the investments as income of the assessee, because the word used is ‘may’ and not ‘shall’ in the said section.

The Kerala High Court in the case of CIT v. G. Anandarajan [1997] 228 ITR 664 (Ker.) held that if the books of account reveal sales and in regard thereto there is no material of a corresponding nature that the assessee could purchase the commodity for the purpose of offering for sale, the situation becomes an invitation for the assessee to explain as to how and from what source he held the amount of the commodity with regard to its purchase before it was offered for sale. However, in the absence of an explanation the deeming provision of section 69 will apply.

The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.) held that the funds comprising the intangible additions made in earlier year would not help an assessee to presume that the said fund was always available to cover the unexplained income of the succeeding years. It is for the assessee to establish that he has not earned any secret profits during the relevant year and that the investment flowed from the intangible additions made in the preceding years.

The Kerala High Court in the case of T.C.N. Menon v. ITO [1974] 96 ITR 148 (Ker.) held that it is clear from a reading of section 69 that before the amount of unexplained investment is included in the total income of an assessee, he is entitled to an opportunity to explain.

Where the deposit stands in the name of the third person, even that person is related to the assessee, the assessee cannot be called upon to explain such deposit. In such case, the proper course is that either the person in whose books the deposit appears or the person in whose name the deposit stands should be called upon to explain the deposit – CIT v. Roshan Lal Seth 178 ITR 660 (Punj.). In this case it was held that the deposit in the name of the assessee’s wife could not to be added to the assessee’s income.

3.3 Department also liable to prove the existence of unexplained investment

The Allahabad High Court in the case of CIT v. Daya Chand Jain Vaidya [1975] 98 ITR 280 (All.) has held that merely because the assessee’s explanation regarding certain investments made by his wife and sons is not acceptable, the revenue cannot treat the investments as the undisclosed income of the assessee. The revenue should bring on record material from which it could be concluded that the investments were in fact made by the assessee. If this was not done, no amount could be added as the undisclosed income of the assessee.

3.4 Additions towards cost of construction of property

It is settled law that when the credibility of the books of account maintained by the assessee is not doubted, the revenue should not be carried away merely by the report of the departmental valuer. When there is neither doubt about the books of account maintained by the assessee nor there is rejection of the same document by the Revenue, the Court should not interfere by substituting its own estimate in the place of one by the Tribunal unless it is shown that the estimate of the Tribunal could not possibly be reached. Thus, where the Tribunal accepted the cost of construction as debited in the books of account of the assessee, it would be justified in deleting the additions made towards estimated undisclosed investment on the basis of the report of the departmental valuer – Asstt. CIT v. C. Subba Reddy 2005 Tax LR 373 (Mad.).

In view of the decision of the Supreme Court in the case of Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407 (SC) : 130 Taxman 511(SC), the Assessing Officer would not be justified in obtaining report of the departmental valuer for the purpose of determining cost of construction and in making additions on the basis of such report towards unexplained investment. Where, by excluding such a report from consideration, there was no material whatsoever warranting any addition on account of unexplained investment, the addition made could not be sustained – CIT v. Ganesh Rice Mills [2005] 145 Taxman 452 (P& H).

3.5 In couse of search some notings were found indicating that the property purchased by the assessee might have been purchased at a price higher than the price disclosed by the assessee

Notings found during the course of search are only indicative but are not a conclusive evidence of the purchase price. In such a case the AO should conduct suitable enquiries and should make addition on the basis of findings of enquiries conducted by him. Addition made merely on the basis of notings found in the course of search without proper enquiry cannot be sustained. Some judicial pronouncements:

In the case of CIT v. P.V. kalyanasundaram [2006] 282 ITR 259 (Mad.) the assessee had purchased land on October 26, 1988 registered for ₹ 4.10 lakh from one R. during the course of search some notings had been found indicating a higher consideration. Mr R’s statement was also taken. In a sworn statement on 8th Dec. 1998 he admitted that he received ₹ 34.85 lakh. In another sworn statement on 11th December 1998, R stated that he received ₹ 34.85 lakh. subsequently in an affidavit given on 8th January 1999 he mentioned the sale consideration at 
₹ 4.10 lakh. The CIT noted that due to conflicting nature of statements given by sellers, his statement could not be relied upon and deleted the said addition. The Tribunal confirmed the findings of the CIT(A). On appeal the Madras High Court held that the burden of proving actual consideration in such a transaction was that of the Revenue. The AO did not conduct any independant enquiry relating to the value of the property purchased. He merely relied on the statement given by the seller. As such the deletion of the addition was justified.

In CIT v. Lalit Bahsin 290 ITR 245 (Del.) assessee purchased a ticket of Calcutta Stock Exchange for ₹ 50,000. The AO took the value of the ticket at ₹ 11.5 lakh on the basis of the prevailing market price and added ₹ 11 lakh as unexplained investment. The Delhi High Court deleted the addition on the ground that AO arrived at conclusion primarily on imaginative basis and conjectures rather than on the basis of any record or books of account and hence deleted the addition.

In the case of Omega Estates v. ITO Ward VII(2) 106 ITD 427 (Chennai) AO relying on some letters given by the assessee to prospective buyers mentioning rate of flats at ₹ 1,250 per sq. ft calculated sale receipts of all flats at the said rate. The Chennai Bench of ITAT held that since the revenue could not prove that actual consideration was more than that recorded by the assessee and since books of account had not been rejected, there was no basis of making the estimated addition.

In the case of Amarjij Singh Bakshi (HUF) v. ACIT 263 ITR (AT) 75 (Del.) a search was conducted at the premises of one Mr. A and the agreement between the assessee and Mr A. was found pertaining to sale of 9.16 acres of land. the consideration mentioned in the agreement was ₹ 7.07 crore as against the consideration of ₹ 23.5 lakh declared by the assessee. The AO added the difference ₹ 6.83 crore u/s. 69B. The court held that the provisions of the Indian Evidence Act are not strictly applicable to the proceedings under IT Act but the broad principles of law of evidence apply to such proceedings. Notings on loose sheets of paper are required to be supported/collaborated by other evidence. A distinction also needs to be drawn between slips of paper or loose sheets found from the possession of the assessee and similar documents found from a third person. In case the statement of the third person is recorded or relied upon then such statement undoubtedly has to be confronted to the assessee and he is to be allowed an opportunity of cross examination. The Delhi ITAT Bench said that the entire addition was based on the document found but there was no evidence to support Revenue’s case that a huge figure over and above the figure booked in the records and accounts changed hands between the parties and thus no addition could be made.

In the case of M. M. Financers (P) Ltd. v. DCIT [2007] 107 TTJ 200 (Chennai) a search was conducted at the premises of MR a business associate of the assessee and an unsigned MOU was found reflecting the purchase price of a land at ₹ 2.4 crore whereas the disclosed value was ₹ 91 lakh. The AO added the difference as income of the assessee. The Chennai ITAT Bench held that since the MOU was found at the premises of MR and not at the premises of the assessee and that the AO had not found any corroborating evidence from any seized material and since there was no evidence of payment of money other than ₹ 91 lakh, the addition was not justified.

In the case of Manohar Lal Rattan Lal v. DCIT [2004] 91 TTJ (Asr) 737 an addition was made solely on the basis of a copy of agreement indicating large consideration, found and seized by the Department. The Amritsar ITAT Bench deleted the addition holding that since the signature of the assessee, i.e., the purchaser was not on the document no addition can be made merely on the ground that the said document was found at the premises of the assessee. Moreover the seller of the property was not examined. Hence no addition can be sustained.

In the case of Rejender Kumar Garg v. DCIT [2000] 67 TTJ (Del.) 347, sale consideration of a property was recorded in the books at ₹ 9.3 lakh but the assessee declared during the search the sale consideration at ₹ 38 lakhs. However in an agreement to sell, found in search, the consideration was stated at ₹ 1.10 crore. The Delhi ITAT Bench directed the AO to compute the income by taking sale consideration at 
₹ 38 lakhs and not one crore as the agreement was not signed and none of the buyers or proposed buyers were examined by AO and the department did not get the property valued to establish its real value.

In the case of Smt. Saroj Kumari L/H of Late Smt. Dampati Devi (Decd) v. ACIT [2004] 91 TTJ (Asr) 733 a search was carried out at the premises of a firm Lachman Dass Jaspal Singh, Mansa. In the course of the search an agreement between Smt. Dampati Devi and Shri Lachmann Dass for sale of a property at ₹1,88,000 was found. The above property was acquired by Dampati Devi at ₹ 33,750. The legal heir of late Dampati Devi argued that the agreement was not signed by the buyer and had not materialsed. But the AO added the same in the hands of the seller also on the ground that the purchaser had accepted the addition in his hands u/s. 69 of the entire amount of ₹ 1,88,000. The Amritsar Bench held that the sole basis of addition was that Lachmann Das (the purchaser) agreed to the addition and on that fact alone addition cannot be made.

In the case of K. P. Varghese v. ITO, Ernakulam and Another 131 ITR 597 (SC), the Supreme Court held that assessee must be shown to have received more than what is declared or disclosed by him as consideration and only then addition can be sustained (also see next para).

However Kerala High Court in the case of CIT v. T.O. Abraham [2012] 347 ITR 378 (Ker) held that where admission was made by seller that price paid was more than that declared in sale deed, the assessment of difference in hands of purchaser was justified.

3.6 Whether additions can be made on the basis of loose sheets and torn papers found in the course of the search?

The principle laid down by the Supreme Court and various Tribunals is that as per section 34 of the Evidence Act, 1872 loose sheets of paper are not to be considered as ‘book’ and hence entries made therein are inadmissible as evidence and cannot be relied upon. Additions made merely on the basis of loose sheets and torn papers is not justified and Revenue has to bring some corroborative evidence to show that the loose papers and sheets actually show some transaction and that the assessee has earned income out of it, which is undisclosed from the department. The Revenue can tax only those receipts, which must have been proved to be income in the hands of the recipient, which must have been proved to be income in the hands of the receipient. Reference may be made to the decision of Supreme Court in CBI v. V.C. Shukla 1998 AIR Vol. 3 SC 410, wherein it was held that entries in the loose sheets, may not have any evidentiary value. In following cases the Tribunal have held that merely on the basis of entries in loose sheets there cannot be an addition – S. K. Gupta v. Dy. CIT [1999] 63 TTJ 532 (Del), Shri Ram Bhagwandas Raheja v. Asstt. CIT [ITA (S&S) No.118/Mum/1996, Bench “B”, Order dated 23rd September, 1998].

Ashwani Kumar v. ITO [1992] 42 TTJ (Del.) 644: [1991] 39 ITD 183 (Del.), Kishenchand Shobhrajmal v. Asst. CIT [1992] 42 TTJ (Jp) 423: [1992] 41 ITD 97 (Jp), D.A. Patel v. Dy. CIT [2001] 70 TTJ (Mumbai) 969: [2000] 72 ITD 340 (Mumbai), Satnam Singh Chhabra v. DCIT [2002] 74 TTJ (Lucknow) 976.

Further Punjab & Haryana High Court in the case of CIT v. Ravi Kumar [2007] 294 ITR 78 (P&H) have held that if assessee claims that loose sheets contains rough calculations, the onus is on the revenue to rebut with material evidence.

Therefore, merely loose sheets or diaries found in the course of search, may not be sufficient for the Revenue to prove that the entries represent undisclosed income of the assessee. Further if entries are not in the handwriting of assessee or the Accountant, burden is on the Department to prove, beyond reasonable doubt that the entries represent the undisclosed income of the assessee.

Insertion of section 292C raising presumption: However after the insertion of section 292C(1) w.r.e.f. 1-10-1975 by the Finance Act, 2007 and as amended by the Finance Act, 2008, where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search u/s. 132 (w.e.f. 1-10-1975) or survey u/s. 133A (w.e.f. 1-6-2002), it may, in any processing under the Income tax Act, be presumed-

(i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person:

(ii) that the contents of such books of account and other documents are true; and

(iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.

As per section 292C(2) inserted by the Finance Act, 2008 w.r.e.f. 1-10-1975, where any books of account, other documents, or assets have been delivered to the Requisitioning Officer in accordance with the provisions of section 132A, then, the provisions of section 292C(1) shall apply as if such books of account, other documents, or assets which had been taken into custody from the person referred to in clause (a) or clause (b) or clause (c), as the case may be, of section 132A(1) had been found in the possession or control of that person in the course of a search u/s 132. (also see last para).

3.7 Where the gold ornaments seized do not tally with the description of the jewellery submitted before the department but the weight of jewellery found in the course of search is less than the disclosed jewellery

Similar facts came before the Jodhpur Bench of ITAT in the case of DCIT v. Arjun Dass Kalwani [2006] 101 ITD 337 (Jodh) wherein it was held that the assessee had been assessed for more jewellery than those found in the course of search for earlier year under Wealth-tax Act, merely because the assessee could not furnish the evidence of remaking, it cannot be said that these jewellery are unexplained investments of the assessee. No addition u/s. 69 is called for.

3.8 Where payment for painting purchased prior to search is made by cheque after search, it is not to be treated as unexplained investment

Similar facts came before the Mumbai Bench in the case of V. Sanjay Kumar v. DCIT [2012] 16 ITR (Trib.) 262 (Mum.) wherein it was held that no amount could be considered as unexplained investment unless there was confirmation from the other party that the amounts were paid in cash other than what was stated by the assessee. Just because the assessee made a payment subsequent to search, the amount paid by cheque could not be doubted and treated as unexplained. Similar view has been expressed by various Courts and Tribunals upholding the basic principle that without corroboration of evidence and cross-examination of third party, addition cannot be made in the hands of the assessee.

3.9 Where assessee admitted undisclosed profit during survey and retracted the same at the time of assessment on the ground that admission was due to mental pressure and coercion

It is a settled law that whatever statement is recorded under section 133A is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law – CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad.) affirmed by Supreme Court in 210 Taxman 248 (SC).

Further CBDT in its Instruction dated 10th March, 2003 vide No. F. No. 286/2/2003/IT (Inv) has also clarified –

“Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, such confessions during the course of search & seizure and survey operation do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. Similarly, while recording statement during the course of search & seizure and survey operations, no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.”

The statement of the assessee cannot be made the sole basis for addition without any material evidence and there is no provision in the statute to prevent the declarant from retracting his statement. The A.O. cannot make an addition without bringing any adequate material on record to prove the real income to be as admitted by the assessee in the course of survey. The A.O. must examine the correctness of the statement before making the addition – ACIT v. A.T. Associates 99 TTJ (Nag.) 74.

3.10 Whether figures in loose papers found in survey where assessee admitted undisclosed investment but later retracted, can be added u/s. 69?

The Agra Bench in the case of Asst. CIT v. Ravi Agricultural Industries [2009] 316 ITR (AT) 1 (Agra) held that figures in loose papers, though admitted but subsequently retracted, could not be the basis for an inference of concealed investments made by the assessee. In such cases, the Assessing Officer is certainly entitled to make further enquiries regarding such information from the loose papers, but where it is not corroborated, no addition can be based on the same.

Information gathered during a survey can, no doubt, be used in the assessment. But where such information is found to be not reliable with reference to further facts, the assessee cannot be pinned down to the information gathered during survey or to the statement by him at the time, since the assessment has to be made with reference to all the materials gathered by the Assessing Officer.

The Amendment to section 292C by the Finance Act, 2008 extending the presumption of correctness to materials found during survey should not make any difference to the conclusion based on further materials.

3.11 Investments in secret business dealings

Where secret business dealings of the assessee involve unexplained investments, the amount invested is assessable u/s. 69 – Himmatram Laxminarainv. CIT 161 ITR 7 ( P & H ).

3.12 Whether entire undisclosed sale can be treated as income

The entire sale proceeds cannot be regarded as profit or treated as undisclosed income of the assessee. It is the net profit rate which is to be adopted – Manmohan Sadani v. CIT [2008] 304 ITR 52 (MP).

Sometimes, the A.O. presumes that there was corresponding purchase for undisclosed sales and he may treat the amount used for such purchase as unexplained investment. The above decision is important.

3.13 Higher stock declared to the bank – whether attracts addition u/s. 69

Reversing its earlier decision of Coimbatore Spinning and Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.), the Madras High Court in the case of CIT v. N. Swamy [2000] 241 ITR 363 (Mad.) observed that we find it little difficult to agree with the observations made in the case of Coimabatore Spinning & Weaving Co Ltd. v. CIT 95 ITR 375 (Mad.) that the alleged practice said to be followed by business houses of declaring larger stocks to the banks for the purpose of getting higher loans or overdraft facilities has neither been shown to exist nor recognised in commercial circles or by courts, and even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statements given to the banks as to the stocks held or hypothecated by them in the banks.

It also held that the assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee has undisclosed income is on the revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee has deliberately suppressed his income.

On similar facts it was held in the case of CIT v. Relaxo Footwear [2002] 123 Taxman 322 (Raj.) that where the Tribunal accepted the assessee’s explanation that the stock statement submitted to bank was to make it easier for the assessee to have availed higher credit facility by inflating the stock position to the bank, it was justified in deleting addition on account of the discrepancy between the stock shown in the books of account and the stock shown in the statement to the bank.

The Jammu & Kashmir High Court in the case of Ashok Kumar v. ITO 201 CTR (J&K) 178 : 149 Taxman 479 (J&K) held that where stock shown in the books of account is properly verified and valued as per cost, no addition should be made on account of inflated stock statement furnished to the bank.

It is immaterial that the difference has arisen on account of higher valuation or on account of disclosing higher quantity to the bank – CIT v. Khan & Sirohi Steel Rolling Mills 200 CTR (All.) 595, Pranab Kumar Dawn v. ITO ITA NO.668/Kol/2010 dated 30-9-2010.

Similar view has also been expressed by the Madras High Court in the case of CIT v. Apcom Computers (P) Ltd. [2007] 158 Taxman 363 (Mad.).

Where the book stock was reliable but inflated stock statement was furnished to bank for obtaining higher credit facility, the addition cannot be sustained – CIT v. Veerdip Rollers P. Ltd. [2010] 323 ITR 341 (Guj.). SLP filed by Department has been rejected by Supreme Court [2008] 307 ITR (St.) 3.

Different Courts and ITA T benches have held that no addition can be made merely on the basis of difference between stock statement submitted by the assessee to the bank and the stock as per books. The burden of the AO to establish the undisclosed income in the hands of the assessee does not stand discharged merely on bringing out the difference between stock statement submitted to bank and assessee’s books – CIT v. Acrow India Ltd, 298 ITR 447 (Bom); CIT v. Das Industries 303 ITR 199 (All); CIT v. Sidhu Rice and General Mills 281 ITR 447 (Bom), CIT v. Sri Padmavati Cotton Mills 236 ITR 340 (Mad); Sri Taraka Jewellers v. ITO ITA No.1007/Hyd/2011 dated 10-5-2012.

However in special facts courts and IT AT benches have held that the difference between stock statement submitted to bank and stock as per books may be added as unexplained investment – Swadeshi Cotton Mills Co. Pvt. Ltd. v. CIT 125 ITR 33 (All.); Dhansiram Agarwal v. CIT 201 ITR 192 (Gau.); CIT v. Pioneer Breeding Farms 295 ITR 78 (Mad.); CIT v. Ashok Estate Private Ltd. 141 ITR 785 (Ker.); Max Text Chemm Products v. CIT 83 ITD 96 (Pune).

3.14 Unexplained stock

Where assessee had not maintained stock register and Assessing Officer, on verification of records of assessee, found certain excess stock of bearings, he was justified in making addition on account of that as unexplained investment, since it was obligatory for assessee to maintain stock register so that one was able to ascertain actual position of stock lying with the assessee in which he was trading – Sanjay Son of Dwarkadas Jajoo v. CIT [2006] 154 Taxman 101 (MP).

Unexplained stock in trade is not covered by section 69 – Addl. CIT v. Danyabhai Pitamberdas & Co. [1974] Taxation 36(1) 25-26 (Guj.). However contrary view has been expressed in Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368 (Bom.) in which stock declared to bank was in excess. (also refer the decision in the case of Smt. Amiya Bala Paul v. CIT 262 ITR 407 (SC) and provisions of section 142A).

3.15 Whether the method prescribed in Accounting Standards for valuation of stock is relevant for the purpose of unexplained investments

In a case suppose the valuation of stock shown in the books of account is on the basis of FIFO (i.e. First In First Out) method, which is mandatory as per Accounting Standard-2 issued by The Institute of Chartered Accountants of India. During the year end, the price of the stock had gone down, therefore, as per the method prescribed in AS-2 the valuation of the stock lying in the showroom as well as godown was made at reduced rate as prevailing at that time. However, the stock valuation sheet submitted to bank for the purpose of obtaining higher loans/overdraft facilities was prepared on the basis of actual costs of the stock. Thus in fact there was no question of any higher amount of stock on the basis of the value of inventory submitted to the bank.

3.16 In case assessee purchased shares at a cost lower than the market price, whether the difference between market price and purchase price shown by the assessee can be added as income u/s. 69

In the given case the investment that is the purchase of shares have been recorded in the books of account. As per section 69 only such value of investments may be deemed to be the income of the assessee as was not recorded in the books of account. Thus section 69 is not applicable. The above view has been expressed in the case of Rupee Finance & management P. Ltd. v. ACIT (2009) 310 ITR (AT) 403 (Mum). However w.e.f. 1-10-2009 as per section 56(2)(vii) the difference between the fair market price and the purchase price will be taxed under the head ‘other sources’ if the assessee is an individual or HUF and the difference between fair market price and purchase price exceeds ₹ 50,000.

3.17 Treatment of unexplained investment in case of partnership firms

The Allahabad High Court in the case of India Rice Mills v. CIT [1996] 218 ITR 508 (All.) held that in respect of capital contributed by partner in firm, the onus is on the partners to explain the source, and if they fail to do so, the amount could be added as income from undisclosed sources in the hands of the partner only and not in the hands of the firm.

3.18 If assessee is found in possession of demonetised notes, can the same be treated as unexplained investment

Demonetised notes ceases to be legal tender and has no value at all and in fact they are scrap papers. Therefore the same cannot be treated as unexplained investment – CIT v. Andhra Pradesh Yarn Combines (P) Ltd. 200 CTR (Ker.) 641.

3.19 Provisions u/s. 142A regarding estimate by Valuation Officer in certain cases

Section 142A has been inserted by the Finance (No. 2) Act, 2004, w.r.e.f. 15-11-1972 to provide that for the purposes of making an assessment or reassessment under the Income-tax Act –

(i) Where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required to be made, the A.O. may require the Valuation Officer to make an estimate of such value and report the same to him.

(ii) The Valuation Officer to whom such a reference is made shall, for the purposes of dealing with such reference, have all the powers that he has u/s 38A of the Wealth-tax Act, 1957.

(iii) On receipt of the report from the Valuation Officer, the A.O. may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment.

However, the above provisions shall not apply in respect of an assessment made on or before 
30-9-2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.

3.20 In case of search where there is no finding as to unexplained investment, whether A.O. can refer valuation to DVO and make additions as per DVO’s report which is not based on comparable cases

In case of search there must be some material that there is an unexplained investment for referring the matter to DVO in case of purchase or construction of a property. Moreover if the report of the DVO is not based on comparable cases, the same cannot be relied up on – CIT v. Abhinav Kumar Mittal [2013] 351 ITR 20 (Del.), CIT v. Dinesh Jain HUF 254 CTR (Del.) 534.

3.21 Whether prerequisite conditions of section 69 have to be satisfied even if presumption u/s. 132(4A) is raised against the assessee

In Ushakant N. Patel v. CIT [2006] 282 ITR 553 (Guj.) it was held that in the first instance it is incumbent upon the authority to establish that there were investments made by the assessee; that such investments were not recorded in the books of account maintained by the assessee; and that such investments had been made in the financial year immediately preceding the assessment year in question.

Even if the contention of the revenue that the provision of section 132(4A) of the Act are available to the revenue during the course of regular assessment proceeding is accepted for the sake of argument, yet nonetheless, the requisite conditions of section 69 cannot be given a go by and have to be met.

Therefore even if presumption u/s. 132(4A) is raised against the assessee, the ingredients by way of prerequisite conditions of section 69 have to be satisfied and cannot be presumed to have been established on the basis of section 132(4A) of the Act simpliciter.

3.22 Whether procedure available in regular assessment by application of the principles relating to burden of proof in sections 68, 69, 69A, 69B and 69C, also apply in search cases

The Special Bench of ITAT in the case of Triumph Securities Ltd. v. Deputy CIT [2011] 10 ITR (Trib.) 1 (Mum.)(SB): [2010] 39 SOT 139 (Mum.) (SB): [2010] 132 TTJ 257 (Mum.)(SB) held that where a search in the case of stock-broker revealed mismatch between actual transactions and those recorded in the books, the income in the block has to be computed after taking into consideration the undisclosed income inferable on the basis of materials found during search and post-search enquiries relating to such materials. The assessee’s argument that the procedure available in regular assessment by application of the principles relating to burden of proof in sections 68, 69, 69A, 69B and 69C, would have no application was found to be without merit. The inference, whether there was an element of undisclosed income embedded in the transactions discovered during search has to be considered in the light of burden of proof on the part of the assessee to explain the discrepancies. The transactions recorded by the stock exchange are good pieces of evidence. Where the assessee did not choose to explain the discrepancies except by furnishing confirmation letters of some parties which did not cover the discrepancies of all clients, the addition is justified.

3.23 Deposit in joint names

Where bank deposits were in joint names of husband and wife and there was no material on record to show who earned the money deposited, nor was there any material to show that money belonged to the husband, half of the interest on such deposits was held taxable in the hands of the husband because of the fact that the wife was assessed on half of the interest at least in one year and she was admittedly owner of a house property – CIT v. Ishwar Das Sharma 158 ITR 167 (Del.).

3.24 Whether maintenance of books of account is necessary for making addition u/s. 69

The section 69 provides that where in any financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income and if A.O. does not find satisfactory explanation from the assessee, then the value of investments may be deemed to be the income of the assessee of such financial year.

The Madhya Pradesh High Court in the case of Dr. Prakash Tiwari v. CIT [1984] 148 ITR 474 (MP) held that where the assessee has not maintained books of account and additions are made towards unexplained investments, the additions made would be sustainable under section 69 and not under section 69B.

For applying sections 69 and 69B, it is not necessary that the books of account are to be rejected. The onus of proving the source of a sum of money is on the assessee. If he disputes the liability for tax, it is for him to show that the receipt was not income or that it was exempted from taxation under the law. In the absence of any proof, the Assessing Officer is entitled to charge it as taxable income. It is not necessary that the books of account have to be rejected expressly or that it is to be, in express terms, recorded that the books of account are not reliable or the explanation is not satisfactory – Unit Construction Co. Ltd. v. Jt. CIT [2003] 260 ITR 189 (Cal.).

Similar view has been expressed in CIT v. Ambience Hotels & Resort Ltd. 83 CCH 021 (Delhi HC).

3.25 Treatment of unexplained investment in case of partnership firms

The Allahabad High Court in the case of India Rice Mills v. CIT [1996] 218 ITR 508 (All.) held that in respect of capital contributed by partner to firm, the onus is on the partners to explain the source, and if they fail to do so, the amount could be added as income from undisclosed sources in the hands of the partner only and not in the hands of the firm. ( also see para 24.5).

3.26 What is Peak Credit theory

As per Peak theory, where a single credit or number of credits appear in the books in the account of any particular person, those with a number of debits should all be arranged in serial order, so that a credit following a debit entry should be treated as referable to the latter to the extent possible. Further the “Peak” of the credits should be treated as unexplained and not the aggregate of the credit amount. (also see next para).

3.27 What is theory of Telescoping

Telescoping is one type of technique which delinks all subsequent transactions of the original transaction or amount which have merely rotation, recycling and conversion of one into another. By this technique a real income is to be determined. The real income is subject to tax in the Income-tax Act, for example if in a search, assets of ₹ 10 lakhs were found and assessee disclosed ₹ 10 lakhs in his return against notice u/s. 158BBC, then it is telescoping that assets found were the application of this disclosed income as on other assets etc. were found in search. Therefore assuming or accepting that the application of this income into assets is called telescoping. Both the above theories, peak theory (see earlier para) and theory of Telescoping are applicable in case of block assessment.

In support of above view reference can be made to the decision of Jaipur Bench of the Tribunal in the case of Ramesh Chand Modi v. Asstt. CIT 1998 Tax World 510 (Jp) and Ahmedabad Bench of Tribunal in case of Kishore Mohanlal Tewala v. Asstt. CIT [1999] 64 TTJ (Ahd.) 543.

3.28 Tax Rate for deemed income u/s. 68, 69, 69A, 69B, 69C and 69D

Please refer amended section 115BBE w.e.f. Asst. Year 2017-18 in para 1 above.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

“Legislature would be guilty of an unconstitutional delegation of its legislative function and power if instead of laying down the policy of law or some other standard or objective criteria for the application of the law, it leaves the matter of selection of the persons or objects for directing the law against them, according to the uncontrolled discretion of the administrative authority.”

State of West Bengal vs. Anwar Ali Sarkar AIR 1952 SC 75. PRELIMINARY: Of late there have been demand for increased public scrutiny of accounts , inspite of statutory audit . Enron and other cases abroad , Satyam case in India have highlighted the need and necessity to have controls and system of checks, perhaps even beyond scope of traditional audit. Financial statements and accounts are being increasingly exiguously examined to rule out possibility of wrong-doings, cover up or evasion of taxes. Financial statements and accounts are coming under increasing scrutiny and investigation. A chartered accountant is a financial investigator and prober, is required to be curious tenacious and well-conversant to identify and unearth frauds, misreporting and wrong claims in accounts.

It is also a fact that business transactions have become more complicated and accounting entries more complex than ever before. This may be one of the causes why possibly frauds could not be detected in some cases. Indeed such cases have made the audit work more comprehensive, intrusive and investigative. Ethical managements may at times regard such inquiries as an unwarranted intrusion or a hounding approach : the concern was noted in DLF Ltd. v. ACIT 2014 366 ITR 390 (Del).


1) Conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders if such conferment is without any guidance, control or checks is violated of Article 14 of the Constitution: Subramanian Swamy v. Director, CBI 20148 SCC 682.

2) Mere possibility that executive authority may abuse its discretion would not be a ground for declaring the legislation unconstitutional.

3) Discrimination based on impermissible and invalid classification and excessive delegation of power can render legislation invalid: Special Courts Bill, In re 1979 1 SCC 380.

4) Grant of approval by higher authority must not be mechanical and principles of natural justice must be followed by giving pre-decisional hearing.

5) In fiscal maters the legislature can amend the law retrospectively, however it cannot take away any vested right conferred on the assessee. In Indian Aluminium Company v. State of Kerala 1996 7 SCC 637 it was held that it is competent for the legislature to enact law with retrospective effect and authorise its agencies to levy and collect tax notwithstanding the declaration by court.

6) AO cannot launch roving and fishing inquiries, as arming a quasi-judicial authority with wide discretion would impair the rights of assessee who can be subject to whims and vagaries; Harakchand R. Banthya v. UOI 1969 2 SCC 166, Krisna Mohan P. Ltd. v. Municipal Corporation of Delhi 2003 7SCC 151, State of Punjab v. Khan Chand 1974 1 SCC 549.

Amendment to Section 142(2a) special audit Constitutional Validity

Constitutional validity of amendment to section 142(2A) of the IT Act was challenged in Sahara India Financial Corporation v. CIT 2017 399 ITR 81 (Delhi). The following points emerge –

A) The decision of Supreme Court in Sahara India v. CIT 2008 300 ITR 403 which was prior to the amendment inserted by Finance Act 2013 is good law and the principles laid down by Supreme Court in 300 ITR 403 should continue to apply even after the amendment.

B) Approval by CIT or Chief CIT must not be mechanical and must show application of mind.

C) A pre-decisional hearing is mandatory and AO satisfaction must be based on objective material and not subjective satisfaction. The powers under the provision cannot be used by AO to merely shift his responsibility of scrutinising the accounts to the special auditor.

D) The term “nature and complexity of accounts” is capable of different interpretation at the hands of different officers and in that sense, equally open – ended .However merely because a particular term is capable of different interpretation it cannot be said to be arbitrary & against the requirement of article 14.

E) The fact that the assessee is already subject to statutory audit and therefore recourse to section 142(2A) is not correct as per the reasoning of Madhya Pradesh High Court in Mohan Trading Company v. UOI 1985 156 ITR 134 MP.

F) The Delhi High Court held that direction of special audit post amendment to section 142(2A) is Constitutionally valid and does not violate Article 14 of the Constitution.


The issue to be examined is power of compounding an offence under Income-tax law is exercisable even when criminal appeal against conviction is pending. The IT Authorities may not exercise such a power in view of specific guidelines issued for compounding of offence, under such circumstances in case of extreme hardship the Courts exercise the Constitutional remedies to grant appropriate reliefs and rights to the citizens.

In the guidelines in compounding the offences under direct tax laws, Government of India, Ministry of Finance, Department of Revenue dated 16/05/2008 has specified as follows.

“4.4 Cases not to be compounded: Notwithstanding anything contained in the guidelines the following cases should normally not be compounded …(f) Where conviction order has been passed by a court. 7.2 Notwithstanding anything contained in the guidelines, the Finance Minister may grant approval for compounding of an offence in a suitable and deserving case, after obtaining report from the board on the petition of the applicant”.

In Government of India Department of Revenue v. Mrs. Inbavalli 2018 400 ITR 352 (Mad). The court exercised writ jurisdiction in a petition to hold that the power of compounding is exercisable even when an appeal against conviction is pending. In this case the assessee an old women of 70 years had not filed return of income of her electrical business. Pursuant a survey u/s. 133A she filed returns. A very huge demand of about ₹ 1.34 crores was raised for the three years which at the stage of the High Court in tax appeals filed u/s. 260 A was pegged along with interest at ₹ 14.85 lakhs which the assessee paid and there was no demands outstanding. In the meantime revenue initiated prosecution proceedings and after trial the Metropolitan Magistrate Court convicted and sentenced the assessee u/s. 276 CC of the IT Act to undergo imprisonment. The assessee preferred appeals u/s. 374(3) of the Code of Criminal Procedure 1973 before sessions Judge , City Civil Court who suspended the sentence of imprisonment and the said matter was pending . The assessee filed a compounding petition which was not entertained on the ground of parameters laid down in guidelines. It has been held in ITO v. Dr. K. Jagadeesan 202 257 ITR 476 (Mad), Chairman CBDT v. Smt. Umayal Ramanathan 2009 313 ITR 59 (Mad.) and V. G. Paneerdas and Company v. Secretary CBDT 2013 352 ITR 77 Mad department can consider compounding applications even after conviction by Trial Court. It was further held that if an appeal is pending against the order of lower court convicting the asseessee, the proceedings are deemed to be pending and hence compounding application can be considered on merits. It may be noted that department has not filed an SLP against the above decision.

Exercising its writ jurisdiction, the Court concluded that the power of compounding is exercisable even when criminal appeal against conviction is pending. The Court also took into consideration the factors like old age, illness and unfortunate events and fact that it is not a case of any wilful suppression.

The Court laid down “The assessee has been found guilty of not filing returns in time for the reasons articulated hereafter. Given the fact that our prisons are teeming with persons convicted of heinous crimes, the energy, time and money that the revenue seeks to expend in a case like this, could have been brought to better use in other graver cases.”

Writ Jurisdiction cannot be invoked to stall inquiry

Section 133(6) of the IT Act empowers AO to require any person, including banking company to furnish any information or document which would be useful or relevant for any inquiry or proceedings under the act. In S. Savithri v. ITO 2018 400 ITR 513 (Karn.) notice calling for particulars of bank account of assessee was issued. The noticee was deceased and therefore the legal representative took up plea that the notice is bad and it cannot cast obligation on legal representatives to furnish information including bank details.

A writ petition was filed contending that in absence of any separate notice being issued in her name she was not accountable or answerable to furnish information u/s. 133(6), it was further contended as no inquiry or proceedings were pending before the authority such information could not be called for and hence a writ was filed.

The Karnataka HC held that there was nothing on record to show that the fact of death was within the knowledge of the department. The legal representative cannot protest or deny obligation to furnish such information including bank details and vouchers. The Court observed “Afterall the wife of a person cannot plead ignorance about a huge cash inflow in her husband’s bank account.” It concluded that cutting short such inquiry by invoking the extra- ordinary jurisdiction of the court is likely to defeat the very purpose for which statutory provision is enacted.

No Writ Petition when statutory remedy of appeal available

AO had passed a reassessment order after complying the procedure u/s. 147-148 of the IT Act. The assessee filed a writ petition challenging the entire proceedings for reassessment. This was based on the fact that certain entries made in loose papers had no evidentiary value and therefore the assessment was based on inadmissible evidence. In this connection reference is made to Common Cause vs. Union of India 2017 394 ITR 220 (SC) where the dispute was with regard to registration of FIR against high Constitutional authorities based on entries made on loose paper seized at the time of search and seizure. It was held that entries in loose papers are not sufficient evidence for directing registration for FIR and inquiry under criminal justice system. In Neeraj Mandoli v. ACIT 2017 399 ITR 287 (MP) it was held that the assessee had challenged the order of assessment in writ petition. When the assessment was already over, there was right to statutory appeal which was available and therefore writ was not appropriate remedy. It was pointed out that the Court cannot go in to various aspects of matters already dealt with in assessment order, for which statutory remedy of appeal was available. The Supreme Court in CIT v. Chabil Dass Agarwal 2013 357 ITR 357 and CIT v. Vijay N. Chandrani 2013 357 ITR 713 (SC) laid down the principle when statutory forum are created for redressal of grievance, writ petition should not be entertained ignoring such statutory dispensation. Similar view was also taken in Joint CIT v. Kalanithi Maran 2014 366 ITR 453 (Mad).

Thus where assessment is already completed after notice u/s. 148 and proceedings held u/s. 147, the assessment has attained finality and therefore it would not be appropriate for the Court to go into various aspects of the matter by entertaining writ petition.

However where assessment is sought to be reopened u/s. 148 and the objections filed have been overruled by the AO, then in such a case the AO will not proceed in the matter for a period of 4 weeks from the date of receipt of the order rejecting the objections so as to enable the assessee to challenge order in accordance with law. This principle of law was laid down in Asian Paints v. DCIT 2008 296 ITR 90 (Bom) and Aroni Commercials v. DCIT 2014 362 ITR 403 (Bom). If the AO has passed order in haste then a writ would lie even though on the assessment order an appeal by way of alternate statutory remedy is available u/s. 246 A.

Where reassessment was made solely on the basis of valuation report it was held in Kamala Ojha v. ITO 2017 397 ITR 197(Chhattisgarh) that the reopening based on valuation report is not valid as a valuation report in only a opinion of a valuer. It was held that the report or information of a valuer cannot substitute the words “reason to believe”of the ITO. An opinion of a third person cannot be “reason to believe” of the ITO and writ of prohibition was issued to the ITO from proceeding to reassessee the income based on valuation report. The Court held that relying upon valuation report without application of mind is per seillegal and without authority of law relying upon ACIT Dhariya Construction Company 2010 328 ITR 515(SC).


1) Pending assessment and appeal: Assessment proceedings and criminal proceedings are independent, while assessment proceedings are civil in nature by IT authorities, criminal proceedings are before Criminal Court. In P. Jayappan v. ITO 1984 149 ITR 696(SC) it was held that the two types of proceedings can run simultaneously and the one need not wait for the other. However the finding of fact and the conclusion by the Appellate Tribunal is binding on Criminal Courts. Thus, if the Tribunal holds that there is no concealment of income or furnishing of inaccurate particulars then the finding is binding on the Criminal Court.

Normally where petitioner has challenged assessment order in appeal and the same is pending adjudication the petitioner cannot be prosecuted in the criminal complaint filed by the department, reference to observations in CIT v. Bhupen Champak Lal Dalal 201 248 ITR 830 (SC):

“The prosecution in criminal law and proceedings arising under the Act are undoubtedly independent proceedings, and therefore there is no impediment in law for the criminal proceedings to proceed even during the pendency of the proceedings under the Act. However a wholesome rule will have to be adopted in the matters of this nature where courts have taken the view that when the conclusions arrived at by the appellate authorities have a relevance and bearing upon the conclusions to be reached in the case necessarily one authority will have to await the outcome of the other authority.”

2) Penalty Dropped : In KC Builders vs. ACIT 2004 265 ITR 562 (SC) it was held that where penalty is dropped, prosecution of an offence u/s. 276C for wilful evasion of tax cannot be proceeded with. The Bombay High Court held that where penalty is cancelled by Tribunal prosecution proceedings are also quashed: Shashi Chand Jain v. UOI 1995 213 ITR 184 (Bom) where the finding in penalty proceedings was that assessee had a genuine belief that tenancy right was not an asset for the purpose of wealth-tax and that there was no wilful attempt to evade tax or false verification in such a case prosecution was not valid. The challenge in this case was byway of writ certiorari for quashing or setting aside criminal complaint filed against the petitioner and a writ mandamus to withdraw/forbear from taking any steps in pursuance of criminal complaint filed against the petitioner. It may further be noted that where substantial question of law is admitted by HC in quantum appeal then no penalty for concealment can arise: CIT v. Nayan Builders 368 ITR 722 (Bom), CIT v. Harsha Bilinagady 379 ITR 529 (Karn) thus the implication could be that in such a case prosecution cannot lie: ITO v. Nandalal 341 ITR 646 (Bom). A criminal revision application was filed to quash and set aside the judgment of additional sessions judge on the ground that proceedings on a complaint filed by the ITO u/s. 276 C and 277 of the IT Act on the ground that Tribunal had set aside the penalty u/s. 271(1)(c). The Court held that when penalty has set aside by the Tribunal the finding becomes conclusive and prosecution was not sustainable.

An interesting issue arose before Patna High Court in Vijay Kumar Malik v. CIT 2017 397 ITR 130 (Patna). The assessee was carrying on business of supply of fodder to the Animal Husbandry Department, Bihar.

The fodder scam came into light and FIR was launched and the assessee was taken into custody. Various notices for reopening and assessment under sections 142(1) 147 were issued and AO brought to tax the entire receipt. A complain was lodged u/ss. 276-277 appeal was filed before CIT(A) to set aside the order for de novo assessment. This order was challenged in Tribunal which was dismissed. The assessee filed the appeal before HC and the HC held that no substantial question of law arose. The assessee filed SLP in SC and also move a writ petition that he be exonerated and that SLP was pending in Supreme Court. In this case dismissing the writ petition the Court held that the assessee had not been exonerated by the IT Department in adjudication proceedings. SLP pending does not mean assessee is exonerated relying upon the case of Radheshyam Kejriwal v. State of West Bengal 2011 333 ITR (58) SC where it was held that exoneration of a person on merits, criminal proceedings on the same facts and circumstances cannot be allowed.

3) Court awarding imprisonment whether mandatory : The issue arises that sections 275A to 278A provide for punishment in terms of imprisonment, the phrase “shall be punishable” gives rise to the question whether punishable would imply mandatory imprisonment or should the word “shall” be interpreted to mean discretion to award fine/penalty but not imprisonment. Courts have no power to reduce punishment prescribed by the section and imprisonment is mandatory and cannot be done away with fine.

In a criminal complaint filed by AO the assessee was convicted and sentenced to undergo rigorous imprisonment for period of two years and to pay a fine of 
₹ 2500/- in another case for another assessment year. The assessee was also convicted and both sentences were ordered to run concurrently. The appeal filed was dismissed by the sessions judge. A revision petition was filed where the Court in Satwant Singh Mehta v. ITO 217 397 ITR 45 (P&H) held that since the assessee was already undergoing sentence and both sentences were to run concurrently, the sentence imposed in the present case was reduced to the sentence already undergone by him and the fine was imposed in default of which sentence to continue. The Court ordered that the assessee be set at liberty if his custody was not required in connection with any other case, subject to payment of fine.

4) Old age 70 Years : CBDT instruction No. 5051 of 1991 dated 07/02/1991 para 4 states “Prosecution need not normally be initiated against a person who has attained the age of 70 years at the time of commission of the offence”. In Pradip Burman S. v. ITO 382 ITR 418 (Delhi) the Court laid down that the person should have reached the age of 70 at the time of commission of the offence. The case of the petitioner was that the complaint filed is liable to be quashed on the ground that at the time of filing of the criminal complaint, the petitioner had attained the age of 70 years and thus no prosecution can be initiated against him. Instruction number 5051 of 1991 dated February 7 1991 mandated that no prosecution could be initiated against a person who is above 70 years, “at the time of commission of offence”. Further the said instructions do not mandate or make it compulsory since the words “need not normally” used in para 4 do not provide an absolute bar on initiation of prosecution. Thus the emphasis is on time of commission of the offence.

5) Charge in complaint under one section can it be shifted to another section

The complaint filed is in respect of each of the offence for which the acused is prosecuted under a specific section At the time of trial, it is felt that the accused is guilty under another section and not under the charge on which the complaint was filed. Thus what is sought to introduce is a charge of a different nature under a different provision and section, in such a case the entire complaint is bad and the prosecution fails since the accused cannot be charged under different section which is different in nature and the offence is specifically different. It may further be noted that while sanctioning prosecution under section 279 the CIT had applied his mind to the provisions of a particular section and offence in respect of which the section contemplates prosecution to change the complaint to a different charge is not permissible. In such a case the complaint is bad and vitiated in law.

6) Section 278AA & Section 278E: By virtue of amendment by Taxation Laws (Amendment Misc. Provisions) Act 1986 sections where the word “without reasonable cause or excuse” have been omitted and deleted and with the insertion of section 278AA, the onus of proving the existence of reasonable cause is shifted on the accused. Section 278E provides that in every prosecution the court shall presume culpable mental state and it is for the accused to prove contrary beyond reasonable doubt. The entire concept in criminal jurisprudence of “mens rea” has undergone change and burden of proof is shifted to the assessee. This presumption is rebuttable but the burden is cast heavily upon the assessee to prove absence of culpability not by mere preponderance of probability but to prove that the charge against him is unsustainable beyond reasonable doubt. Thus the initial burden lies on the assessee sections 275A to section 280 D of the Act deals with offences and prosecution in chapter XXII.


Parameters for granting stay: Often in its anxiety to collect revenue even on disputed tax after summarily rejecting stay applications and that too without giving reasons has become very common. This is coupled with instructions and orders issue to assessee’s bank to stop payment or in many cases the bank balance is taken away by the department even without notice. In order to avoid such practice of rejecting stay and issuance of garnishee orders a writ petition is the only remedy.

In KEC International Limited v. B.R. Balakrishnan 2001 251 ITR 158 (Bom) at pg. 160 the Court laid down parameters which are on the administrative side of the department to be followed while disposing of stay application/petition:

A) The tax authorities should at least set out the facts of the case.

B) When assessed income exceeds returned income, the authority will consider whether assessee has made out a case for unconditional stay where part of the disputed amount is required to be deposited short prima facie reason should be given in the order.

C) The financial status and difficulties should be examined, whether the assessee is financially sound and viable to deposit the amount.

D) Generally coercive measure may not be adopted during the period provided by the statute for appeal, it is an only when assessee is likely to defeat the demand recourse to coercive action can be taken which may be indicated in the order.

A writ petition is required to be filed for stay of recovery and arbitrary collection of tax and against garnishee orders even when there is no such right specified. In ITO v. Mohammed Kunthi 1969 71 ITR 815 (SC), it was pointed out that in cases where enforcement of disputed demand would render appeal nugatory, stay is bound to be granted.

It is pertinent to note that where petition is filed for stay, it is the duty of tax authorities to pass a speaking order even though while acting only in administrative capacity, but the law requires that principles of natural justice should be observed so that there is no arbitrary use of coercive powers. A well-known percept in administrative law is that any statutory order should be a speaking order mere adverting to certain facts would not constitute a speaking order. The Supreme Court has emphasise that a speaking order “must speak for itself“ and should be self-contained intelligible order: AA v. Hindumal Balmukund Investment 2001 251 ITR 660 violation of principle of natural justice would also mean authority not giving copies of documents and also not giving sufficient opportunity to the assessee to act in time .

Writ on Time Limits: Coercive power of attachment and sale of property is resorted by department in this connection, the time limit specified under Rule 68B of Schedule II of the IT Act is required to be followed as it deals with period of limitation. Sale of attached immovable property cannot be postponed beyond 3 years from the date on which the amount of tax, interest, fine, penalty or any other sum had become conclusive. A writ petition was filed in Noorudin v. TRO 2001 251 ITR 357(Mad) where examining the period of limitation the court set aside the sale as the same was not carried out within the prescribed time. Thus even in cases of attachment and sale writ petition can be filed where sanctity of time limits are challenged.

Law on Protective Assessment: Where AO assesses the same income in another assesee’s hands appeal against such protective assessment is permissible: Tarabhen R. Patel v. ITO 1995 215 ITR 323 (Guj).

Lalji Haridhas v. ITO 1961 43 ITR 387 held that a protective assessment is to protect the revenue and the same does not invalidate the other assessment but the levy itself is enforceable only against one assessment and not under both Hemlata Agarwal v. CIT 1967 64 ITR 428 (All).

A protective recovery is not permissible PK Trading v. ITO 1970 78 ITR 427 (Cal).

CIT v. Cochin Company 1976 104 ITR 655 (Ker). Sunilkumar v. CIT 1983 139 ITR 880 (Bom).

Jaganath Bawri v. CIT 1998 234 ITR 464 (Gau).

R. Rajbabu v. TRO (2004) 270 ITR 256 (Mad)(High Court) Writ would be maintainable where same income is sought to be taxed twice.

Board circular to grant stay on deposit of 15% of demand to be followed and can be extended till disposal of appeal

Assessment was made and the assessee paid 38% of outstanding demand, by virtue of which there was grant of stay of demand pending disposal of appeal by CIT(A). Subsequently the stay was sought to be removed on the ground that the assessee had sufficient resources and no hardship would be caused to it by depositing the amount, hence direction to pay balance outstanding demand the failure of which would lead to coercive proceedings.

In Vodafone India v. CIT 2018 400 ITR 516 (Bom) Court held that the circular issued by CBDT to grant stay till disposal of the first appeal on payment of 15 % of disputed amount is binding on the IT authorities, that the IT authorities had completely ignored circular and the asseessee had paid almost 38% of the outstanding demand. The Court further observed that the parameters laid down in KEC International v. Bala Krishnan 251 ITR 158 (Bom) from grant of stay were completely ignored. The Court while relying upon the decision of UTI Mutual Fund v. ITO 2012 245 ITR 71 (Bom) and MMRDA v. deputy DIT in WP no 2348 of 2014 decided on 29th October 2014 held that mere having funds is no financial hardship, would not itself justify deposit to be made where prima facie case is made. Further there was no delay on the part of the assessee which could be attributed for delay in disposal of pending appeal.

UTI Mutual Fund v. ITO ( 2012)345 ITR 71 (Bom.) (HC)

Administrative directions for fulfilling recovery targets for collection of revenue should not be at the expense of foreclosing remedies which are available to the assessee for challenging the correctness of a demand. The sanctity for the rule of law must be preserved. The remedies which are legitimately open in law to an assessee to challenge a demand cannot be allowed to be foreclosed by a hasty recourse to coercive powers. Judicial functions performed by IT authorities require judicial consideration.

Recovery proceedings against member of AOP where appeal is filled by AOP against its assessment which is pending, rejection of stay is not justified without fulfilling the parameters of stay. In a writ petition filed the petitioner had intervened in the appeal for the stay it was held that looking into the various guidelines stay should be granted.

1 No recovery of tax should be made pending

(a) Expiry of the time limit for filing an appeal;

(b) Disposal of a stay application, filed by the assessee and reasonable period thereafter to enable the assessee to move a higher forum. Coercive steps may, however, be adopted where the authority has reason to believe that the assessee may defeat the demand, in which case brief reasons may be indicated.

2. The stay application, if any, moved by the assessee should be disposed off after hearing the assessee and bearing in mind the guidelines in KEC International;

3. If the Assessing Officer has taken a view contrary to what has been held in the preceding previous years without there being a material change in facts or law, that is a relevant consideration in deciding the application for stay;

4. When a bank account has been attached, before withdrawing the amount, reasonable prior notice should be furnished to the assessee to enable the assessee to make a representation or seek recourse to a remedy in law;

5. In exercising the powers of stay, the ITO should not act as a mere tax gatherer but as a quasi judicial authority vested with the public duty of protecting the interest of the revenue while at the same time balancing the need to mitigate hardship to the assessee. Though the AO has made an assessment, he must objectively decide the application for stay considering that an appeal lies against his order.

Stay Petition

Discretionary power means according to the rules of reason and justice, not according to personal opinion but according to law. It is not to be arbitrary, vague and fanciful, but legal and regular, to be exercised not capriciously but on judicial grounds and for substantial reasons. If an authority cast with a public duty of exercising discretion takes into account matters which the Court considers to be improper for guidance of the discretion, then in the eyes of law, it is an improper exercise of the discretion.

Instruction No. 96 [F. No. 1/6/69-ITCC], dated 21-8-1969

2. The then Deputy Prime Minister had observed as under : “. . . where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapse on the part of the assessee.”

Instruction No. 1914, Dated 2-2-1993

A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances e.g. where the assessment order appears to be unreasonably high pitched or where genuine hardship is likely to be caused to the assessee [Para 2 B(iii)].

• Issue is decided by Appellate Authority in favour of assessee

• Conflicting views of High Courts

• Department has not accepted view of jurisdictional High Court

Stay petition to be disposed off by AO/TRO within 2 weeks and communicate the decisions.

Demand of high pitched assessment can be stayed after Instruction No. 1914.

Maharana Shri Bhagwat Singahiji of Mewar v. ITAT (1997) 223 ITR 192 (Raj)

Soul vs. Dy. CIT( 2008) 173 Taxman 468 (Delhi)

Valvoline Cummins Ltd. v. Dy. CIT (2008) 307 ITR 103 (Delhi)

Maheswari Agro Industries v. UOI (2012)346 ITR 375 (Raj.)

Office Memorandum [F. No.404/72/93-ITCC], dated 29-2-2016 [15% of demand as pre-deposit for stay]

“3. It has been reported that the field authorities often insist on payment of a very high proportion of the disputed demand before granting stay of the balance demand. This often results in hardship for the taxpayers seeking stay of demand.”

Above 15% – addition on the same issue has been confirmed by appellate authorities in earlier years or the decision of the Supreme Court or jurisdictional High Court is in favour of Revenue or addition is based on credible evidence collected in a search or survey operation.

Below 15% – The assessing officer is of the view that the nature of addition resulting in the disputed demand is such that payment of a lump sum amount lower than 15% is warranted (e.g. in a case where addition on the same issue has been deleted by appellate authorities in earlier years or the decision of the Supreme Court or jurisdictional High Court is in favour of the assessee,) the assessing officer shall refer the matter to the administrative Pr. CIT/CIT, who after considering all relevant facts shall decide the quantum/proportion of demand to be paid by the assessee as lump sum payment for granting a stay of the balance demand.

In a case where stay of demand is granted by AO on payment of 15% of the disputed demand and the assessee is still aggrieved, he may approach the jurisdictional administrative Pr. CIT/CIT for a review of the decision of the assessing officer.

Office Memorandum [F.No.404/72/93-ITCC], DATED 31-7-2017 [15% changed to 20%]

Flipkart India(P) Ltd. v. ACIT [2017] 396 ITR 551 (Kar)(HC)

“It is true that Instruction No.4(B)(b) of the Circular dated 29-2-2016, gives two instances where less than 15 per cent can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No. 2B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29-2-2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Principal Commissioner, are required to see if the assessee’s case would fall under Instruction No. 2B(iii) of Circular No.1914, or not. Both the Assessing Officer, and the Principal Commissioner, are required to examine whether the assessment is “unreasonably high pitched”, or whether the demand for depositing 15 per cent of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not”.

Mumbai Metropolitan Region Development Authority vs. DDIT (2015) 273 CTR 317 (Bom.)(HC)

(a) The order on stay application must briefly set out the issue and the submission of the assessee/applicant in support of the stay;

(b) In cases where the assessed income under the impugned order far exceeds returned income so as to make the demand arbitrary or the issue arising for consideration stands concluded by a decision of a higher forum or where the order appealed against is in breach of Natural Justice or the view taken in the order being appealed against is contrary to what has been held in the preceding previous years ( even if issue pending before higher forum) without there being a material change in facts or law, stay should normally be granted;

(c) If not, whether looking to the questions involved in appeal, keeping in view the likelihood of success in appeal what part of the demand the whole (in case issue covered against the applicant by a decision of higher forum) or part of it and must be justified by short reasons in the order disposing of the stay application;.

(d) Lack of financial hardship would not be a sole ground to direct deposit/payment of the demands if the assessee/applicant has a strong arguable case on merits;

(e) In cases where the assessee/applicant relies upon financial difficulties, the authority concerned should briefly indicate whether the assessee is financially sound and viable to deposit the amount or the apprehension of the revenue of non recovery later. Thus warranting deposit. This of course, if the case is not otherwise sustainable on merits;

(f) The authority concerned will also examine whether the time to prefer an appeal has expired. Generally, coercive measures may not be adopted during the period provided by the statute to go in appeal. However, if the authority concerned comes to the conclusion that the assessee is likely to defeat the demand, it may take recourse to coercive action for which brief reasons may be indicated in the order.

(g) In exercising the powers of stay, the Authority should always bear in mind that as a quasi judicial authority it is vested with the public duty of protecting the interest of the Revenue while at the same time balancing the need to mitigate hardship to the assessee. Though the assessing officer has made an assessment, he must objectively decide the application for stay considering that an appeal lies against his order; the application for stay must be considered from all its facets and the order should be passed, balancing the interest of the assessee with the protection of the Revenue.

A writ petition is required to be filed when stay is refused or when there is undue haste and hardship caused to the assessee without following the parameters of various judicial decisions. In case of attachment of property /bank accounts it is necessary to approach the Court by way of a writ to protect the rights of the citizen.

[Source : Paper presented at 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]


If you can lay down your life for a cause, then only you can be a leader. But we all want to be leaders without making the necessary sacrifice. And the result is zero – nobody listens to us!

Swami Vivekananda

1. Tax Management

A rupee of tax saved is much more than the rupee of income earned. After understanding the tax laws, availing of various exemptions, deductions and incentives provided under the tax laws and resorting to tax management / tax planning, many tax payers could promote their resources and prosper. So much so that one could reduce the tax burden to a tolerance limit. Brunt of taxation can be substantially reduced by adopting proper tax planning. Tax management is sound law and certainly not bad morality to so arrange one’s affairs as to reduce the brunt of taxation to a minimum. Arranging affairs in such a manner that charge of tax is reduced is not prohibited. Availing various recognised methods of tax planning is lawful and has the sanctity of the courts. Avoidance of tax is not tax evasion. End effect of tax planning, tax avoidance and tax evasion is one and the same but tax evasion alone deserves to be deprecated and need not be resorted to. Adopt / Suggest Tax Management – It is your duty. Not Tax Evasion – It is a crime against Society and needs to be deprecated and tax evaders socially boycotted.

2. Will

Meaning and method : ‘Will’ as defined under sec. 2(h) of the Indian Succession Act means “the legal declaration of the intention of a testator with respect of his property which he desires to be carried into effect after his death”. A Will comes into effect after the death of the testator and is revocable during the life time of the testator. Every person of sound mind not being a minor can dispose of his property by Will. The testator is at liberty to bequeath the disposable property to any person, he likes. There is no restriction that a Will has to be made in favour of legal heirs, relatives, close friends, etc. A Will or codicil need not be stamped or registered though it deals with vast immovable properties. A Will can be on a sheet of paper. It need not be on a stamp or Government paper. However, to generate confidence, it is advisable to execute on a stamp of any denomination. It is advisable to get each sheet of the Will signed in the aforesaid manner from the testator and to put photo of the testator.

2.1 Execution and attestation

According to sec.63 of the Indian Succession Act, 1925 three things are required for a valid execution of a Will: (i) it must be in writing, (ii) the testator must sign or affix his mark to the Will or it shall be signed by some other person in the presence of the testator and by his directions and the signatures or mark of the testator or the signatures of the person signing for him shall be so placed that it shall appear that it was intended thereby to give effect to the writing as a Will, and (iii) the Will shall be attested at least by two or more witnesses, each of whom has seen the testator sign or affix his mark or has seen some other person sign the Will, in the presence and by the directions of the testator, or has received from the testator a personal acknowledgement of his signature or mark or of signature of such other person and each of the witness shall sign the Will in the presence of the testator. However, it shall not be necessary that more than one witness be present at the same time. There is no particular form of attestation for the Will but aforesaid requirements need be complied with. It is desirable that additional witnesses are near relatives / legal heirs. An executor to execute the Will on death be appointed.

2.2 To whom bequest can be made

A person can make a bequest in favour of any living person, idol, charitable trust, firm, Hindu Undivided Family, institution, corporate body, society, an infant (including a child en ventre sa mere), an idiot, a lunatic or other disqualified person. A bequest can be made to the heirs or relations or nearest relations or family or kindred or nearest of kin or next of kin of a particular person without any qualifying terms. In such cases the class so designated forms the direct and independent object of the bequest and the property bequeathed shall be distributed as if it had belonged to such person and he had died intestate in respect of it. Where a bequest is made to the representatives or legal representatives or personal representatives or executors or administrators of a particular person and the class so designated forms the direct and independent object of the bequest, the property bequeathed shall be distributed as if it had belonged to such person and he had died intestate in respect of it.

2.2.1 A Will can be made in favour of would be daughter-in-law or would be son-in-law or prospective wife of a minor son or grandson etc. If it is specified that in case the specified person does not marry up to a particular date, the bequeathed property shall vest in the person living. Reliance can be placed on the decisions of the Madras High Court in CIT vs. P. Bhandari (1984) 147 ITR 500, L. Goutam Chand and another vs. CIT (1989) 176 ITR 442, Sakhti Charities vs. CIT (1984) 149 ITR 624 and CIT vs. M. K. Chandrakanth (1997) 225 ITR 101. It is possible to make a bequeath in favour of a person not to devolve on him as individual property but as the property of Hindu Undivided Family with such individual as Karta, if the Will declares such intentions in clear terms. In this manner the property received by such person would be of his Hindu Undivided Family and a new unit of assessment would come up.

2.3 Probate

Where the property and the parties are situate in the territories of Bengal, Chennai and Mumbai and where the parties are not residing in those territories but the property involved is situated within those territories, a probate has to be obtained by the executor. The burden of proof lies on party propounding the Will. He must satisfy the conscience of the Court that the instrument so propounded is the last Will of a free and capable testator.

2.4 There are manifold benefits as follows

(i) It is easy to make. Can be executed on white sheet of paper with two witnesses. Registration is not compulsory. Can be lodged for registration with the Sub-Registrar, to be opened only after the death. Can be executed by the testator in any language. It is desirable to get it not arised by a Notary Public, which is easy.

(ii) More than one Will can be executed in respect of different property in favour of different legatees but there should not be any contradiction and it should not be mentioned that it is the only Will. Each Will can be handed over to the legatee.

(iii) Joint Will can be executed by the spouse bequeathing property belonging to both in favour of the survivor. On the death of the deceased, property of the two would vest in the survivor. It can be stated as to how the residue estate after death of the two would stand bequeathed.

(iv) It is easy to cancel. Can be cancelled by executing another Will. Only last Will survives, not the earlier Will(s).

(v) One discretionary trust can be formed by Will and if such trust is the only trust so declared by him, shall not be liable to charge of tax at the maximum marginal rate on account of proviso (ii) to sub-section 1 of section 164. Normally a family welfare trust can be declared by Will and by way of such trust the beneficiaries as well as distribution of the asset can be in-determinate or unknown.

(vi) Capital gains on transfer of a capital asset can be avoided (sec.47(ii)). The cost of acquisition of the asset shall be deemed to be the cost, for which, the previous owner of the property acquired it, u/sec.49(1)(ii))

(vii) Any sum of money or property given by way of a Will to any extent, is not treated as income from other sources of the beneficiary/legatee (sec.56 (2)(vii) proviso (c)).

(viii) It can be made in favour of any person. It can also be made in favour of a Hindu Undivided Family, to enable to constitute nucleous for a Hindu Undivided Family.

(ix) Property bequeathed on the death of the testator vests in the executor. The executor has to distribute the bequeathed property in favour of the specified person(s). It can be done by mere declaration and handing over of the property/title deeds without any stamp duty or registration.

(x) A Will can be made in such a manner, whereby the distribution of the estate is postponed and during such period an assessment of the deceased in the name of the estate and through the executor u/s. 168 would be made. Thereby a dead person can be assessed till distribution.

(xi) Stamp duty on transfer can be avoided.

2.5 A Hindu can bequeath his individual property as well as share in the coparcenery property by way of Will. Manifold benefits are inherent by making a Will. However, it has been noticed that very negligible few taxpayers are taking advantage of the medium of Will. It can be a tool for further reducing the nominal rate of tax and expanding units of assessments with manifold advantages to regulate the members of family and relatives. Its importance need not be emphasised but is well-known. It is highly desirable that every person make a Will to avoid and avert litigation amongst legal heirs and representatives and in order to reduce rate of tax in the hands of relatives and would be children, grand-children, daughters and sons-in-law and to create Hindu Undivided Family, to add more units. Such persons could be surely reminded: “Have you executed your Will, if so, please see that it is in a safe place and do inform your spouse about it. If not, please fix up the earliest appointment with the ever friendly lawyer next door! All the ladies should ask their husbands that there is a proper Will duly executed and insist on seeing it and also to ensure that the wife is the sole beneficiary under that Will. One should be advised to act expeditiously. Liability of tax after death of an individual can be better managed through Will. It is high time to explore multifold benefits of WILL as noticed hereinbefore.

Death is certain and none could and can avoid. It is highly desirable that every person above the age of 60 years take it seriously and avoid inheritance by non-estamentary succession, which causes family disputes amongst legal heirs, disrupting family peace and harmony.

3. Family Arrangement

Hindu Undivided Family: The expression “Hindu Undivided Family” has not been defined under the Income-tax Act or in any other statute. When we dissect – essentials are (i) Should be Hindu, (Jain, Sikh and Buddhist are treated as Hindus but not Musalman or Christian); (ii) A family i.e., group of persons – more than one; and (iii) should be undivided i.e., living jointly and having commonness amongst them. All the three essentials are cumulative. It is a body consisting of persons lineally descended up to three generations or three degrees from a common ancestor and include their wives, children and adopted child. By the Hindu Succession (Amendment) Act, 2005 w.e.f. 
9th September, 2005, daughter, even after marriage, would be a co-parcener, of which her father is a co-parcener and in addition, on her marriage, shall become a member of her husband’s joint Hindu Undivided Family. Her rights in the parental family would remain intact as that of a son. Discrimination on account of gender stands abolished for good, though belated.

3.1 Concept and Assessment

The concept of Joint Family under Hindu law as well as the HUF in Income-tax Act, 1961 is broadly the same. HUF is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). An HUF is a fluctuating body, its size increases with birth of a member in the family and decreases on death of a member of the family. Females come into HUF on marriage. If there is family nucleus, under the Hindu system of law a joint family may consist of a single male member and widows of deceased male members, and the Income-tax Act does not indicate that a Hindu Undivided Family as an assessable entity must consist of at least two male members (Refer Gowli Buddanna vs. CIT (1966) 60-ITR-293 (SC). Where a coparcener having a wife and minor daughters and no son receives his share of joint family property on partition, such property, in the hands of the coparcener, belongs to the HUF of himself, his wife and minor daughters. (Refer N. V. Narendranath vs. C.W.T. (1969) 74-ITR-190 (SC). Assessment in the status of a Hindu Undivided Family can be made only when there are two or more members of the Hindu Undivided Family. (Refer C. Krishna Prasad vs. C.I.T. (1974) 97-ITR-493 (SC). Husband and wife can constitute HUF if property is received on partition. (Refer CIT vs. Parshottamdas K. Panchal (2002) 257-ITR-96 (Gujarat).

3.2 Ancestral Property

All property inherited by a male Hindu from his father, father’s father or father’s father’s father, is ancestral property. The essential feature of ancestral property according to Mitakshara Law is that the sons, grandsons and great-grandsons of the person who inherit it, acquire an interest, and the rights attached to such property at the moment of their birth. Thus, if ‘A’ inherits property, whether movable or immovable, from his father or father’s father, or father’s father’s father, it is ancestral property, as regards his male issue. (AIR 1936 Orissa 331). A person inheriting property from his three immediate paternal ancestors holds it, and must hold it, in coparcenary with his sons, son’s sons, and son’s son’s sons. Dipo vs. Wassan Singh – AIR 1983 SC 846 at 847- 48; Arjun Singh vs. Pingle Devi – AIR 1993 HP 34; Om Prakash vs. Sarvjit Singh – AIR 1995 HP. 92. The share, which a coparcener obtains on partition of ancestral property, is ancestral property as regards his male issue. They take an interest in it by birth (Lal Bahadur vs. Kanhaiya Lal, (1907) 29 All 244: 34 IA 65; Chatturbhooj vs. Dharamsi, (1885) 5 Bom HCOCJ 128: Rulla Ram vs. Amar Singh, AIR 1994 HP 102 relying on AIR 1987 SC 558 and AIR 1986 Pat 1753).

3.2.1 Accumulations of income of ancestral property, property purchased or acquired out of income or with assistance of ancestral property, the proceeds of sale of ancestral property, and property purchased out of such proceeds, or obtained in lieu of such property, are ancestral property. (Maya Ram vs. Satnam Singh, AIR 1967 Punj 353). It is well established that sons, grandsons and great-grandsons acquire a vested interest not only in the income and accretions of ancestral property, which accrued after their birth, but also in the income and accretions, which accrued prior to their birth. (Isree Persad vs. Nasif Koover – AIR 10 Cal 1017 at 1021; Jagmohan Das vs. Mangal Das) 11 Mad 246.

3.2.2 According to the Mitakshara School of Hindu Law all the property of a Hindu joint family is held in collective ownership by all the coparceners in a quasi-corporate capacity. The textual authority of the Mitakshara lays down in express terms that the joint family property is held in trust for the joint family members then living and thereafter to be born (see Mitakshara, Chapter 1.1-27). The incidents of co-parcenership under the Mitakshara law are : first, the lineal male descendants of a person up to the third generation, acquire on birth ownership in the ancestral properties of such person; secondly that such descendants can at any time work out their rights by asking for partition; thirdly, that till partition each member has got ownership extending over the entire property conjointly with the rest; fourthly, that as a result of such co-ownership the possession and enjoyment of the properties is common; fifthly, that no alienation of the property is possible unless it be for necessity, without the concurrence of the coparceners, and sixthly, that the interest of a deceased member lapses on his death to the survivors. A coparcenery under the Mitakshara School is a creature of law and cannot arise by act of parties except in so far that on adoption the adopted son becomes a co-parcener with his adoptive father as regards the ancestral properties of the latter.” State Bank of India vs. Ghamandi Ram – AIR 1969 SC 1330.

3.3. Family Arrangement : When a partition is effected between the co-parceners / members of a joint Hindu Family, the partition deed attracts stamp duty under the State Law. However, it can be avoided by arriving at a family arrangement in between the members. The family arrangement may be even oral. If the terms of the family arrangement are reduced to writing; a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made, either for the purpose of the record or for information of the Court for making necessary mutation. It has been held that in such a case the memorandum, itself, does not create or extinguish any rights in immovable property and is, therefore, not compulsorily registrable. (Refer Tek Bahadur Bhujil – AIR 1966 SC 292; Sahu Madho Das vs. Mukund Ram – AIR 1955 SC 481; Vijay Kumar vs. Sanjay Kumar – AIR 2003 Delhi 168; Digambhar Adhar Patil vs. Deoram Girdhar Patel – AIR 1995 SC 1728, AIR 1973 Allahabad 158, AIR 1988 AP 147; AIR 1966 SC 1836; AIR 1966 (SC) 252; AIR 1997 (Raj.) 211; AIR 1998 (Raj.) 348 and Kale and others vs. Dy. Director of Consolidation and Others, AIR 1976 SC 807.

3.3.1 The family arrangement must be a bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family; (2) It must be voluntary and should not be induced by fraud, coercion or undue influence; (3) The family arrangement may be oral in which case no registration is necessary; (4) It is well-settled that registration would be necessary only if the terms of the family arrangement are reduced into writing. Which create or extinguish any rights in immovable properties and would fall within the mischief of section 17(1)(b) of the Registration Act; (5) The members who may be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the property which is acknowledged by the parties to the settlement. Even if one of the parties to the arrangement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld and the Courts will find no difficulty in giving assent to the same; (6) Even if bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable, the family arrangement is final and binding on the parties to the settlement. (Refer Kale vs. Deputy Director : AIR 1976 SC 807; Lakshmi Ammal vs. Chaprovahthi – AIR 1999 SC 336; C.G.T. vs. D. Nagrirathinam (2004) 266-ITR-342 (Madras).

3.3.2 Like partition, family arrangement is not a transfer. A family arrangement, on the contrary, is a transaction between members of the same family for the benefit of the family so as to preserve the family property, the peace and security of the family, avoidance of family dispute and litigation and also for saving the honour of the family. Such an arrangement is based on the assumption that there was an antecedent title in the parties and the agreement acknowledges and defines what that title is. It is for this reason that a family arrangement by which each party takes a share in the property has been held as not amounting to a conveyance of property from a person who has title to it to a person who has no title. (Refer : S. K. Sattar 
S. K. Mohd. Choudhari vs. Gundappa Amabadas Bukate (1966) 6 SCC 373; C.I.T. vs. A.L. Ramnathan (2000) 245-ITR-494 (Madras.)

3.3.3 A Memorandum of Understanding cannot be said as a bogus document on account of one being a stranger or allotted more than his share, if it is established that he had some semblance of interest and disputes have cropped up between the said persons. Memorandum of Understanding actuated to resolve disputes can be treated as family settlement (Refer Ramdev Food Products Pvt. Ltd. vs. Arvindbhai Rambhai Patel & Others AIR 2006 S.C. 3302). It is settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not. CIT. vs. Ponnammal (R.) (1987) 164-ITR- 706 (Mad.); CIT vs. Ramanathan (AL) (2000) 245-ITR- 494 (Mad.); Kele vs. Deputy Director of Consolidation (1976) AIR 1976 SC 807 and Maturi Pullaiah vs. Maturi Narasimham (1966) SC 1936 relied on in C.I.T. vs. Kay Arr Enterprises and Others (2008) 299-ITR-348 (Madras)

3.3.4 Transfer of shares in Companies can be possibly made by way of family arrangement between the family members as held in CIT vs. Kay Arr Enterprises (2008) 299-ITR-348 (Madras). Mrs. P. Sheela vs. I.T.O. (2009) 308-ITR-(AT) 350 (Bangalore). The Apex Court in Hari Shanker Singhania & Brs. vs. Gaur Hari Singhania & Brs. AIR 2006 SC 2488 held that family settlement or arrangement is to be treated differently from any other formal commercial settlement and technicalities of limitation etc. should not come in the way of implementation for maintaining peace and harmony in a family. However as a matter of caution in such cases there may be long drawn litigation and for one or other lapse it may be a faulty proposition. It should be the last resort.

3.4 A family arrangement must be entered into by all parties thereto. The concept of family arrangement has now been accepted in our country and the Supreme Court has generally taken a broad view of the matter and leaned heavily in favour of upholding any such arrangement. The enjoyment of properties by different members of the joint family, who have been put into possession pursuant to a family arrangement, operates as an estoppel against such member and cannot be jeopardised by a member resiling from the arrangement, more particularly when the arrangement had been entered into a considerable time ago. (AIR 2002 Bombay 129). There is thin difference between joint family property and joint property. If the property is acquired with the contributions of the coparceners and the income or savings from joint family fund or from the ancestral property, that property will be a joint family property in which each and every coparcener has a right to claim. A joint property is being created by investment made by individuals from their independent earning. Priya Ranjan Bhagat vs. Saroj Bhagat – AIR 2016 Jharkhand 22 at 34. There was family arrangement by a deceased among the children of R and S. Each of the members held apart from personal properties, family properties and shared in business concerns and each of the family businesses was independently managed by one of the parties. Disputes arose between the parties. The disputes were referred to an arbitrator. The arbitrator suggested a settlement to which the parties agreed. In terms of the settlement, the assessee had to resign from KB, a firm and transfer his interest to NR for a consideration of ₹ 35,000/- being the capital balance of the firm. Accordingly, the assessee transferred the shares. NR transferred the shares held by him in favour of the assessee. The assessee claimed that there was no transfer which gave rise to any capital gains. However, the assessing authority held that there was a transfer, there was a capital gain and, therefore, the assessee was liable to pay the tax. The Commissioner (Appeals) confirmed the order. The Tribunal held that there was no transfer and it was only a family arrangement. Therefore, the assessee was not liable to pay tax on capital gains. On appeal to the High Court it was held : “A partition is not a transfer. What is recorded in a family settlement is nothing but a partition. Every member has an enterior title to the property which is the subject-matter of a transaction, that is partition or a family arrangement. So there is adjustment of shares, crystallization of the respective rights in family properties and, therefore, it cannot be construed as a transfer in the eye of law. When there is no transfer there is no capital gains and consequently no tax on capital gains is liable to be paid”. CIT vs. R. Nagaraja Rao (2013) 352-ITR-565 (Karnataka) at 566.

Family arrangement / settlement though not registered can be used as piece of evidence. Subraya M. N. vs. Vitalla M. N. & Others – AIR 2016 S.C. 3236. An oral partition of joint family property amongst members of a HUF is permissible : AIR 1958 S.C. 706; AIR 1988 S.C. 881; 259-ITR-265 (S.C.)

4. Private Trust

Trust : A person if competent to contract, can constitute a trust of his movable or/and immovable property, for the benefit of any person, for a specified period. Such person is called as ‘Creator of the Trust’; person(s) in whose favour the trust is created is called ‘the Trust property’ and the person(s) to whom the property is entrusted is called the ‘Trustee’ A Trustee has to be a person competent to contract and both the creator and trustee have to execute ‘Trust Deed’ duly stamped and registered if for an immovable property. On creation of a valid trust the corpus and income therefrom shall be assessed in the hands of the Trust through its representative, the Trustee and not in the hands of the creator of the Trust. If it is determinate trust with specified share and known beneficiaries, would be assessed where section 161 of the Income-tax Act as an individual and at normal rates, but if beneficiaries are unknown or share is indeterminate would be known as discretionary trust, assessable at 
the maximum marginal rate u/s. 164 of the I.T. Act.

4.1 Discretionary trust and its assessment

In the case of a discretionary trust, under which the trustees have absolute discretion to distribute the income of the trust to certain specified beneficiaries, and thereafter to distribute the corpus between another set of beneficiaries, again in their absolute discretion, the latter set of beneficiaries are also beneficiaries for the purpose of s. 164 and the income from the trust can be assessed at the maximum marginal rate : Gosar Family Trust. CIT (1995) 215-ITR-55. A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in the due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour : CWT vs. Estate of Late HMM Vikram Singhji of Gondal (2-14) 363-ITR-679 (SC). Section 166 of the Act gives an option to the Department to tax either the representative assessee or the beneficial owner of the income. Once the choice is made by the Department to tax either the trustee or the beneficiary, it is no more open to the Department to go behind it and assess the other also at the same time : see Circular No. 157/26-12-74 98-ITR- (St.) 41. Distributions received by a beneficiary from a discretionary trust can be assessed in the hands of the beneficiary or in the hands of the trust : CIT vs. Kamalini Khatau (1994) 209-ITR-101 : CIT vs. Dr. Anand Sarabhai Trust (1998) 231-ITR-524. See also CIT vs. Bharti Devi Sarabhai (1998) 231-ITR-526 (SC). This Section 164 cannot be read as being a code in itself applicable to the taxation of the income of a discretionary trust. Consequently, it cannot be held that the beneficiary of a discretionary trust, even if he has received its income in the accounting year, cannot be taxed thereon because this section does not provide for such contingency. Where income of a beneficiary trust or a part thereof is actually received by a beneficiary, tax shall be charged thereon at the rate applicable to the total income of the beneficiary if this benefits the Revenue : CIT vs. Kamalini Khatau (1994) 209-ITR-101 (SC). Profits created to accounts of respective beneficiaries have to be assessed in the hands of the beneficiaries : Moti Trust vs. CIT (1999) 236-ITR-37 (SC).

4.2 Exception

In a case where the relevant income or part of relevant income is receivable under a trust declared by any person by Will and such trust is the only trust so declared by him, would not be assessable at the maximum marginal rate u/s. 64 but would be assessed at normal rate. As stated in Proviso (ii) it should be by a Will as explained hereinbefore in para 2 and it should be only one and single trust created under the Will. It more than one trust is created exception would not apply.

5. Conclusion

Always a sincere attempt should be to resort to tax management, so as to have large cash flow and expand the trade and promote new industries. Each one of the functionary should resolve to act for common good and for the welfare of the citizens. It is high time that ways and means are evolved whereby honest and law abiding taxpayers are not put to inconvenience, harassment and witch-hunting.

The tax administration need to be geared up to come up to the expectations of the honest taxpayers. It is high time that during 71st year of Independence, all citizens resolve to eliminate tax evasion and bring glory to Bharat. Let each taxpayer pledge to pay the due taxes forthwith after due planning.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

After passing Law from Surat Law College, I decided to practice Law in Gujarat High Court. One of the seniors suggested that when you have ample time, why don’t you do LL.M. I found that idea good since I was interested in taxation and corporate matters, I decided to study LL.M. with taxation.

During the course of my study in LL.M. income-tax was one of the subjects. The Professor of Income-tax suggested, "Kamal" if you want to learn income-tax and also cultivate good English language. You must read a book on income-tax written by Mr. Nani Palkhivala." I immediately got the book and read it 3 to 4 times because of my examination point of view. At that time while reading the book, I was greatly impressed by the learned author. Though income-tax was considered to be a complicated subject the commentary on the said Act is quite easy to understand. The learned author made Income-tax Act very simple by his own style so that even a layman can easily understand the same. The language used is very lucid. When you read the book, you feel that you are reading a book on some English literature. Ultimately, I passed my LL.M and started active practice in 1972.

During my practice also, in some of the tax matters which I was handling, I have always relied upon the book of Palkhivala. On a few occasions, I had an opportunity to listen to his speech at Ahmedabad However, I had no opportunity to meet him personally.

Some time in October 1980, during my Diwali vacation, I had gone to Atul Township, near Valsad, where my father was serving. Shri Palkhivala came there to deliver a speech. I also attended the same. After the speech, Shri Siddharth Kasturbhai. the then Managing Director, decided to organise a tea party in honour of Shri Palkhivala to which I was also invited.

During that time I had a good personal discussion/conversation with Shri Palkhivala. He enquired of me that you are practising in which branch; how is the work in the Gujarat High Court and all related issues regarding practice. At that time, I informed the learned author that Sir you are glad to know that I have read your book 3 to 4 times. I had barely completed my sentence, he immediately asked me Mr. Mehta why did you read my book 3 to 4 times. I explained to him, "Sir, income-tax was my subject in LL.M. Those days, they did not ask direct questions relating to" the subject. Instead the paper setter quoted some sentence/ quotation from your book and then expected the students to discuss the same. So unless and until a student had read the Palkhivala book, he could not answer the question correctly."From my statement he understood that (in those days), if one had to successfully complete his LL.M with income-tax, he had no option but to read his book thoroughly. He had, thereafter; trust and confidence in what I had said. In fact I narrated to him one of’ the quotations from his book at that time. He was greatly impressed by the fact that I had read his book many times. After my conversation was over, he immediately informed me that Mehta when you have read my book 3 to 4 times, I request you that if you find any mistake please tell me. If you point out any mistake, in my new edition, I will try to correct the same. I was clearly flabbergasted with the humility of the learned author. He was an international lawyer and I was very junior advocate at that time. Still, I saw his humility. I was greatly impressed by the same.

Secondly, in February 1983, a group of matters concerning interpretation of Section 4 of the Central Excise Act was fixed in the Supreme Court. The issue was of considerable public importance and large revenue was at stake, and, therefore, our advocate on record J. B. Dadachandji decided to engage Shri Nani Palkhivala in the said matters. I had two or three matters out of 50 matters group. On the very first day, before start of the matter. we had a detailed conference at Delhi in Taj Hotel. We were about 25 to 30 people, various advocates and a number of representatives of the clients who were discussing the matters. Shri Palkhivala was asking questions to each of them. to ascertain their view point and what they wanted to submit before the Supreme Court. When my turn came, I also informed him that in this matter there are main issues but there are also two secondary issues which are related to my case. I explained to him my view point. In support of the same, I had handed over xerox copies of relevant section. rule and judgments in that behalf. For 5 to 7 minutes, he had gone through my note regarding section and rule. My note was a small paragraph of 8 to 10 lines. After reading it very carefully, he noted the relevant sections and rules. He immediately told that what Mr. Mehta says is correct and what you have said has lot of substance and when I argue the matter, I will definitely put this issue before the Supreme Court in my own way. My confidence in that matter was immediately increased. Other advocates and representatives had congratulated me after the meeting was over because my submission had been appreciated by Shri Palkhivala.

Three Essentials

The innate intelligence and inborn skills of 
Indians are so great that India can reach the top if only we can have education, organisation
and discipline.

Nani in "My Experience as an Ambassador"

[Source: Article published in book titled "Nani Palkhivala – The Role Model edited by Major General Nilendra Kumar, Pg. 117


Every idea that strengthens you must be taken up and every thought that weakens you must be rejected,

Swami Vivekananda

Dear Brothers & Sisters,

Trust you enjoyed the summer with your loved ones and had nice time in vacation.

It is now that we have to cover the lost time and back to hard work. The deadlines are approaching fast for professional work, it is time for our children to tighten their belts as schools are going to start from 1st July.

We at AIFTP are getting ready for Amritsar Conference and look forward to meeting many of our fellow members. Friends who have never been to Amritsar shall have great experience as you will get the feel of our past and history of independence at Jalianwala Bhag. The great sacrifice of the men and women against the whims and fancies of British Officers i.e., General Dayer.

The line dividing two countries at Wagha Border. The Golden temple and Harminder Saheb may refresh the memory of great saints and example of communal harmony as the plinth stone was laid by muslim brothers.

It will also refresh your memory of operation Blue Star by the security personnel and resultant loss of a great Indian leader Smt. Indira Gandhi.

We had enough of history, now in our fraternity Dr. M. V. K. Moorthy is working hard on the GST front to get the rightful rights of our Tax Practitioner brothers and sisters. Let us keep our fingers crossed for the outcome.

It is our bounden duty to advise our clients properly and motivate them to declare their income correctly to avoid the complications in future. Now for coming three months apart from GST returns all our friends will be busy in uploading the I.T. returns, care must be taken to compare the income with Form 26AS. Please do remember that now GST returns are linked with PAN number, there should be no discrepancy in turnover shown in GST and reported to I.T. authorities. We must make it sure before uploading I.T. returns.

I wish happy joyful July with cool rains and all around greenery to all of you.


Ganesh N. Purohit
National President